Economic and Political Studies

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Growth strategy and TFP growth: comparing China

and four Asian tigers

Junxue Jia & Yunxia Chao

To cite this article: Junxue Jia & Yunxia Chao (2016) Growth strategy and TFP growth:
comparing China and four Asian tigers, Economic and Political Studies, 4:2, 156-170, DOI:
10.1080/20954816.2016.1180767

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ECONOMIC AND POLITICAL STUDIES, 2016
VOL. 4, NO. 2, 156–170
http://dx.doi.org/10.1080/20954816.2016.1180767

RESEARCH ARTICLE

Growth strategy and TFP growth: comparing China and

four Asian tigers
Junxue Jia and Yunxia Chao
China Financial Policy Research Center, School of Finance at Renmin University of China, China

ABSTRACT ARTICLE HISTORY

This paper compares the total factor productivity (TFP) growth per- Received 9 June 2015
formance of the Chinese mainland and the Four Asian Tigers dur- Accepted 2 October 2015
ing their high-growth period and examines the effect of growth Published online 6 June 2016
strategies pursued by these economies on TFP growth using a
KEYWORDS
state-space model. Our research results show that TFP growth is Chinese mainland; four
quite limited in these economies, which is mainly attributed to Asian tigers; growth
their growth strategy. No significant productivity gains arise from strategy; TFP growth
the rapid growth of investments, trade openness, and an underval-
ued currency in these economies. The TFP growth is even found
negatively related to trade openness for South Korea, the
exchange rate undervaluation for Chinese Taiwan and Singapore,
and the falling relative price of capital for the Chinese mainland,
Singapore and South Korea. Government interventions encourage
long-term TFP growth for the Chinese mainland and Taiwan, but
hinder it in other economies. Higher inflation reduces TFP growth
in Chinese Taiwan and Singapore.

Introduction
Perhaps the most important challenge faced by policymakers in China today is how to
sustain economic growth. In the past three decades, China has experienced miraculous
achievements in economic development. Its gross domestic product (GDP) per capita
has grown by an average rate of 8.77% during the period 1978–2009, which was
remarkably higher than the world average of 1.38% (World Bank 2010). Furthermore,
China had successfully and impressively maintained a rapid growth during the 2008
global financial crisis. Its growth miracle seems far from ending.
Since the early 2000s, however, economists have been increasingly concerned about
China’s growth strategy and whether its economic growth can be sustained. Some
economists believe that there has been notable growth in the total factor productivity
(TFP), which is attributed to a successful growth strategy pursued by China since
1978.1 For example, Chow and Lin (2002) find that TFP growth was on average 2.7%
during the period of 1978–1998, which accounted for 28% of China’s GDP growth of
that year. Perkins and Rawski (2008) show that an average 3.8% TFP growth explained
over 40% of GDP growth during the period 1978–2005. Similarly, Bosworth and

CONTACT Yunxia Chao [email protected] China Financial Policy Research Center, School of Finance
at Renmin University of China, China
ß 2016 Economic and Political Studies
 ECONOMIC AND POLITICAL STUDIES 157

Collins (2008) attribute 40.1% of China’s GDP growth to its TFP growth during the
period 1978–2004. By contrast, some studies argue that China’s economic growth is
mainly investment-driven with limited productivity improvement. Young (2003) finds
that the average TFP growth rate in China was 1.4% during the period 1978-1998.
Zheng, Bigsten, and Hu (2009) show that the TFP growth rate was 3.72% in the early
reform periods (before 1995), but declined to 1.77% afterwards. Wu (2011) finds that
the TFP growth in China was only 0.3% during the period of 1978–2008. More recently,
Tian and Yu (2012) employ a meta-analysis of TFP growth in China and find that its
mean was approximately 2% after 1978, contributing to 20% of the GDP growth.
These arguments remind us of the debate in the early 1990s on another economic
growth miracle, which occurred in the Four Asian Tigers (namely, Hong Kong SAR,
Chinese Taiwan, Singapore and South Korea) during the period 1960s–1990s. The
average growth rates of GDP per capita in the four economies were over 6.0%during
the period 1965–1990, whereas the world average was only 1.7% (World Bank 2010).
Such a miracle was commonly thought to be driven by the accumulation of massive
factors (Kim and Lau 1994; Krugman 1994; Young 1994, 1995), which collapsed in the
1998 financial crisis. It is widely accepted that the Chinese mainland shares many fea-
tures with the Four Tigers. They pursued a similar growth strategy during their takeoff
stages, although no agreed definition exists on what constitutes such a growth strategy.
Several major features, including high investment rates, rapid trade-opening, strong
export orientations (with an undervalued currency), active government interventions
and macroeconomic management, have arguably been critical for the growth experien-
ces of these economies (Boltho and Weber 2009; Herrerias and Orts 2010; Sarel 1996;
World Bank 1993; Xu 2010). Given this background, many economists were worried
that the Chinese mainland would follow the Four Tigers’ growth path and that its
growth might suddenly end.
However, the quantitative comparative analysis of the five economies during their
takeoff stages is still inadequate. More importantly, despite the key role that the growth
strategy and TFP growth have played in determining long-run growth performances of
the five economies, limited attempts have been made to explore the relations between
the growth strategy and the TFP growth in these economies.2 Using the data from the
five economies during their high-growth period, this paper compares the TFP growth
performance of the Chinese mainland and the Four Tigers and examines the role of
growth strategies pursued by these economies in determining TFP growth under a
common framework. For each economy, a state-space model in which the TFP growth
is treated as a latent variable is estimated using the Kalman filter algorithm. Since TFP
growth is unobservable, the state-space model seems a natural and appropriate way to
simultaneously estimate the GDP–TFP system and to improve the estimation of TFP
growth (Fuentes and Morales 2011). Moreover, by introducing strategy-related varia-
bles into the state equation, this approach enables us to make a more accurate assess-
ment on the TFP growth effects of the growth strategy. Clearly, this helps identify the
critical challenge for the growth strategies pursued by the Chinese mainland and the
Four Tigers from a productivity perspective, and provides lessons for these economies
and other developing economies to sustain economic growth.
This paper is organised as follows. The empirical methodology and econometric
model are presented in the second section. The third section describes the data and
158 J. JIA AND Y. CHAO

variables used in this paper. The empirical results are analyzed in the fourth section.
The fifth section presents conclusions.

Empirical methodology
In this paper, we use the state-space model to estimate TFP growth and its determi-
nants. For comparison, TFP growth is also estimated by using the growth accounting
method. This section provides a brief description of the two approaches.

Growth accounting
The method widely used to estimate TFP growth in the literature is growth accounting
(GA) based on an aggregate production function. Specifically, the following
Cobb–Douglas production function under the assumption of constant return to scale is
often employed:

Yt ¼ At Kta ðHt Lt Þ1a ; (1)

where Yt and Kt denote total output and physical capital stock in period t, respectively.
Ht represents human capital stock, Lt represents labor input, At is the TFP, and the
parameter a is the output elasticity of capital. Let Lt ¼ Ht Lt denote the labor adjusted
by human capital, and the traditional decomposition is given as follows:

D lnðYt Þ ¼ aD lnðKt Þ þ ð1  aÞD lnðLt Þ þ D lnðAt Þ; (2)

where D is the first-order difference operator. Once the parameter a is known, we can
obtain an estimate of TFP growth from Equation (2). The value of a is usually set as
the share of capital in total income, which amounts to assuming profit maximisation
under the condition of perfect competition in both input and output markets. Thus,
this method imposes strict constraints on the estimation of TFP growth.
An alternative method of obtaining the value of a is through an econometric esti-
mation of the aggregate production function. It is assumed that TFP takes the form of
an exponential time trend, namely, At ¼ A0 ect , where A0 represents TFP in the initial
period. Then, we obtain the following growth accounting equation with the time
trend t:

lnðYt =Lt Þ ¼ c þ a lnðKt =Lt Þ þ ct þ et ; (3)

where c is a constant item and et is the error term. A constant rate of TFP growth, c,
can also be obtained from the econometric estimation of Equation (3). However, the
assumption that TFP grows at a constant rate over long periods seems not adequately
convincing.

State-space model for TFP growth

The state-space model provides a useful tool for analyzing a dynamic system involving
unobservable variables. It seems to be a natural and appropriate method for the esti-
mation of TFP growth. Moreover, the introduction of potential determinants of TFP
 ECONOMIC AND POLITICAL STUDIES 159

growth into the state equation provides a more accurate exploration of the driving
forces behind TFP growth.
It is assumed that TFP growth (DLnðAt Þ) follows a first-order autoregressive and
moving average process (ARMA (1, 1)) augmented with the determinants of TFP
growth.3 The state-space model for the GDP-TFP system is specified through the
observation equation and the state equations as follows.
The observation equation is:

D lnðYt =Lt Þ ¼ D lnðAt Þ þ aD lnðKt =Lt Þ þ tt : (4)

And the state equation is:

D lnðAt Þ ¼ bD lnðAt1 Þ þ gD ln Xt þ unt1 þ nt : (5)

In the observation Equation (4), TFP growth is treated as a latent (or state) variable
that is defined by the state equation (5). Xt is a matrix of variables determining TFP
growth and is specified in fourth section. tt and nt are error terms that represent white
noise disturbances uncorrelated with each other.
The models (4)–(5) can be estimated using the Kalman filter algorithm based on
the maximisation of the log-likelihood function. Specifically, the estimation and maxi-
misation procedures use numerical optimisation methods with an initial estimate for
the parameters and are iterated until the estimated parameters converge. The limit of
the iterations corresponds to the maximum likelihood (ML) estimator of the parame-
ters, and the estimate of a smoothed state variable (namely, TFP growth) is simultan-
eously obtained.
Obviously, the state-space representation allows a direct econometric estimation of
the elasticity of capital, instead of imposing it in the traditional Solow residual account-
ing method. Moreover, the TFP here includes additional components beyond just
technological progress, since it can be affected by exogenous variables, such as fiscal
policy, economic openness, capital quality, exchange shocks and so on. On one hand,
we can study the impact of these factors on TFP growth directly. On the other hand,
the econometric estimation of the observation equation gives a residual that is unre-
lated to the all explanatory variables (including the determinants of TFP growth) in
the model, while the Solow residual includes all that is unrelated to production factor
growth, but may be related to the determinants of TFP growth. This is an important
improvement over the Solow residual methodology. Hence, this approach can provide
more accurate estimates of the parameters and TFP growth than the growth account-
ing method (Fuentes and Morales 2011).

Data and variables

The data used in this paper are mainly from the Penn World Tables (PWT, version
7.0) (Heston, Summers, and Aten 2011), the International Monetary Fund’s
International Financial Statistics (IFS), and World Development Indicators of World
Bank (World Bank 2010). All real variables are measured in 2005 US dollars to
reflect purchasing power parity (PPP). The sample period is 1978–2009 for
the Chinese mainland and 1965–1990 for the Four Tigers, which are their respective
160 J. JIA AND Y. CHAO

high-growth periods. Table 1 reports the descriptive statistics for the main variables of
the five economies.

Output, labor and capital

Total output (Yt ) is measured using real GDP, and labor input (Lt ) is measured as the
number of employed workers. Figure 1 shows that the GDP growth rate in Chinese
mainland was remarkably high, approximately at an average of 10% in the sample. For
the Four Tigers, Figure 1 shows a similar picture for 1965–1990 but the growth rate
declined to a dramatically lower level afterwards. The number of employed workers in
Chinese mainland was undoubtedly the largest among the five economies, at an aver-
age of 667.6 million (Table 1). After an increase from 2.0% in 1978 to 3.2% in 1983,
the growthrate of labor inputs in the Chinese mainland declined to 0.8% in 2009, with
an average of 1.6% over the sample. In contrast, labor inputs in the Four Tigers grew
more rapidly over the sample period, at an average growth rate of approximately 3.0%.
Only the data on real investment are available for each economy. Thus, physical
capital stock (Kt ) is estimated using the perpetual inventory method, given the initial
capital stock(K0 ):

Kt ¼ ð1  dÞKt1 þ It ; (6)
where It denotes real investment in period t, and d is the rate of depreciation that is
assumed to be 5% for each economy as in Zheng et al. (2009).4 Following Yang
(2003) and Wu (2011), initial capital stock (K0 ) is estimated according to the following
equation:

K0 ¼ I0 =ðd þ g Þ; (7)
where g is the average GDP growth rate over a stable period, and I0 is the real invest-
ment in the initial period. The initial year and the stable period are selected as 1952
and 1953–1959 for the Chinese mainland, and as 1960 and 1961–1967 for the Four
Tigers to reduce the influences of measurement errors on the estimation of the initial
capital stock. The estimated initial capital stock is US $250,607.1 million for the
Chinese mainland and US$21,489.4 million for Chinese Taiwan, which are very close
to the estimates of Wu (2011) and Chow and Lin (2002).
As shown in Figure 2, all five economies experienced a remarkable accumulation of
physical capital during their high-growth periods. In particular, South Korea accumu-
lated the fastest with an average accumulation rate of 13.0%, which was significantly
higher than its GDP growth rate of 8.2%. However, this key feature of the extensive
growth model is not sustainable in the long run. In practice, all Four Tigers have
undergone dramatic declines in the accumulation rates of physical capital along with
the end of their growth miracles during the late 1990s. Another prominent fact is that
physical capital in the Chinese mainland showed a trend of accelerating accumulation
over the sample: the accumulation rate increased from 8.5% in 1978 to 12.4% in 2009,
which is also higher than its GDP growth rate (9.7%).
Following Barro and Lee (2001), human capital (Ht ) is measured as the average
years of schooling of the working age population (namely, the population from 15 to
 ECONOMIC AND POLITICAL STUDIES 161

Table 1. Summary statistics.

Economy Variables Obs Mean Standard Deviation Minimum Maximum
Chinese Mainland Y 32 3,298.40 2,688.70 588.40 10,000.00
K 32 8,690.60 7,403.80 1,600.00 28,000.00
L 32 667.59 96.33 484.44 793.84
H 32 6.23 1.11 4.49 8.06
Sg 32 15.32 0.99 13.57 17.13
Open 32 39.20 15.00 25.42 70.80
Oval 32 44.53 19.69 26.98 96.21
Rp 32 107.07 5.43 96.85 121.07
Inf 32 5.42 6.45 1.40 24.10
Hong Kong SAR Y 26 61.14 34.84 20.09 128.37
K 26 173.24 102.37 54.75 379.90
L 26 2.18 0.53 1.41 2.84
H 26 7.48 1.18 5.71 9.36
Sg 26 3.81 0.26 3.35 4.32
Open 26 107.84 28.76 73.67 184.02
Oval 26 69.44 9.56 57.23 84.27
Rp 26 64.61 11.16 42.81 82.56
Inf 21 7.84 5.26 4.80 18.10
Chinese Taiwan Y 26 120.58 74.04 32.30 277.24
K 26 192.35 137.95 31.53 481.19
L 26 6.37 1.27 4.49 8.42
H 26 5.56 0.62 4.69 6.63
Sg 26 18.42 3.19 14.60 23.90
Open 26 58.15 18.32 24.12 84.76
Oval 26 55.82 10.45 42.79 77.64
Rp 26 127.22 16.82 103.61 156.64
Inf 26 6.16 9.69 2.60 47.30
Singapore Y 26 30.85 17.09 8.93 67.96
K 26 131.61 74.51 46.25 276.58
L 26 1.04 0.29 0.64 1.56
H 26 5.30 0.63 4.31 6.62
Sg 26 9.90 1.08 8.37 11.82
Open 26 294.34 52.76 206.71 395.87
Oval 26 63.43 6.52 54.11 75.15
Rp 26 62.60 11.97 34.03 74.48
Inf 26 3.71 5.65 1.90 22.40
South Korea Y 26 210.00 118.70 65.20 486.90
K 26 441.10 356.90 58.30 1,300.00
L 26 13.23 2.97 8.75 18.54
H 26 7.79 1.46 5.47 10.28
Sg 26 9.88 1.77 7.43 12.76
Open 26 21.83 9.03 4.93 33.38
Oval 26 49.43 12.24 26.84 67.86
Rp 26 96.87 11.71 84.35 122.98
Inf 25 11.47 7.60 2.30 28.70
Y, total output; K, physical capital stock; L, total labor; H, human capital stock; Rp, the price of capital goods relative to
consumption goods; Sg, government expenditure as a share of GDP; Open, the sum of exports and imports as a share
of GDP; Oval, exchange rate over valuation; Inf, inflation rate.
Y and K are expressed in 2005 millions of dollars measured using purchasing power parity (PPP), L is measured in
millions of persons, and H is measured in year; Sg, Open, Oval, Rp, and Inf are expressed as percentages.

64 years of age). The data on Chinese Taiwan’s human capital stock are directly from
Lin (2003). For other economies, the educational attainment data for five-year intervals
from 1960 to 2010 are from Education Statistics of World Bank (World Bank EdStats
2011). We assume a constant growth rate of educational attainment during the five
years and then obtain data for each year.5 Although the average years of the working
age population in the Chinese mainland increased from 5.6 in 1978 to 8.4 in 2009, the
mean value (6.23 years) is lower than those of South Korea and Hong Kong SAR (7.79
and 7.48, respectively).
162 J. JIA AND Y. CHAO

25 Hong Kong SAR Singapore

Chinese Taiwan South Korea
20 Chinese Mainland

15
Percent

10

0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-5 Year

-10
Figure 1. Growth rates of real GDP. Data source: Heston, Alan, Robert Summers and Bettina Aten.
2011. ‘Penn World Table Version 7.0.’ Center for International Comparisons of Production, Income
and Prices, University of Pennsylvania.

25 Hong Kong SAR Singapore

Chinese Taiwan South Korea
20 Chinese Mainland

15
Percent

10

0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Year
Figure 2. Growth rates of physical capital stock.

Determinants of TFP growth

We focus on the roles of government interventions, trade openness, export orientation,
capital quality, and macroeconomic stability in determining TFP growth. Government
interventions, trade openness, and export orientation have been widely thought as the
key elements of growth strategies pursued by the Chinese mainland and the Four
Tigers during their high-growth periods (Boltho and Weber 2009; Herrerias and Orts
2010; Sarel 1996; World Bank 1993; Xu 2010). The quality of capital is used to capture
the effect of the rapid growth of investment on TFP growth, because technological pro-
gress tends to be embodied in the latest vintages of higher quality capital (Greenwood
and Jovanovic 2001). Moreover, the introduction of capital quality helps make up for
the ignorance of investment-specific technological progress in the growth accounting
method (Chen 1997). Finally, macroeconomic stability resulting from good
 ECONOMIC AND POLITICAL STUDIES 163

macroeconomic management and fewer economic distortions has been recognised as

the crucial factor for the growth experiences of the five economies.
More specifically, government expenditure as a share of GDP (Sgt ) is used as a
proxy for government interventions (Thomas and Wang 1996). By providing R&D
subsidies and expenditures for applied research and training, the government could
play an active role in promoting technological progress and efficiency improvements,
particularly in developing countries whose market mechanisms are generally not per-
fect. On the other hand, government expenditures may crowd out private R&D invest-
ment and create distortions in resource allocations among fields of research. Thus,
a priori government interventions may either encourage or hinder TFP growth. The
sum of exports and imports, as a share of GDP, serves as a measure of trade openness
(Opent ). An increase in trade openness exposes the economy to foreign technology
and, perhaps more importantly, to foreign competition, thus provoking a rapid techno-
logical progress. We therefore expect a positive correlation between trade openness and
TFP growth. Following Miller and Upadhyay (2000) and Berg, Ostry, and Zettelmeyer
(2012), we use the exchange rate overvaluation (Ovalt ), measured as PPP over GDP
divided by the exchange rate, as a proxy for export orientation. Less overvalued (more
undervalued) exchange rate implies a stronger export orientation. The overvalued
exchange rate will stimulate imports, limit exports, and particularly undermine the
development of domestic manufacturing sector, which hinders TFP growth. However,
it can also encourage technical upgrades of production structures. Therefore, the asso-
ciation between the exchange rate overvaluation and TFP growth is ambiguous. The
price of capital goods relative to consumption goods (Rpt ) is used as a proxy for the
quality of capital (Greenwood and Jovanovic 2001). As some literature (Delpachitra
and Van Dai, 2012; Chen, 1997) points out, the traditional growth accounting method
will understate the contribution of TFP to GDP growth, whereas the contribution of
capital accumulation will be overestimated, because the technology progress embedded
in capital will increase the marginal productivity of capital, affecting capital
accumulation. By controlling capital quality through Rpt as a TFP determinant, the
underestimation problem mentioned earlier has been alleviated to a large extent. If
capital-embedded technological progress occurs, the decline in this relative price
reflects the improvements in the quality of capital caused by the arrival of a new
technological generation and, thus, is associated with a faster growth of TFP. Inflation
(Inft ), measured as changes in the consumer price index (CPI), is used to capture the
influences of macroeconomic instability. A stable economic environment benefits the
development of firms, thus encouraging firms’ innovation activities. Hence, macroeco-
nomic volatility, with higher inflation, is expected to have an adverse effect on
TFP growth.
Among the five economies, the Chinese mainland and Taiwan had a higher degree
of government interventions: the share of government expenditure over GDP was on
average 15.32% and 18.44%, respectively (Table 1). In contrast, the average share of
government expenditure was only 3.81% in Hong Kong SAR. Singapore and Hong
Kong SAR stand out as remarkable with regard to their openness of trade. Their sums
of exports and imports were, on average, 294.34% and 107.84% of their GDP. Over the
sample, all five economies, particularly the Chinese mainland, preserved an underval-
ued currency relative to PPP. Chinese Taiwan and South Korea had a higher price of
164 J. JIA AND Y. CHAO

Table 2. Augmented Dickey–Fuller (ADF) unit root tests for main variables.
Economy D ln ðY=L Þ D ln ðK=L Þ D lnðRpÞ D lnðSgÞ D lnðOpenÞ D lnðOvalÞ D lnð1 þ Inf Þ
Chinese Mainland 3.065** 4.171** 4.821*** 5.102*** 4.293*** 4.001*** 5.417***
Hong Kong SAR 5.100*** 7.059*** 3.148*** 3.674*** 2.672*** 2.900*** 4.847***
Chinese Taiwan 3.597** 3.964** 5.114*** 4.307*** 2.730*** 3.265*** 6.509***
Singapore 3.145** 1.719* 3.796** 3.588** 4.397*** 2.648** 6.051***
South Korea 4.378*** 2.930* 5.223*** 4.624*** 4.683*** 2.767*** 4.663***
D indicates the first difference operator.
*, **, and *** denote the significance at 10%, 5%, and 1%, respectively.

Table 3. Estimation results for the state-space model.

Economy Chinese Mainland Hong Kong SAR Chinese Taiwan Singapore South Korea
Output Elasticity 0.715*** (0.13) 0.673*** (0.13) 0.658*** (0.17) 0.504*** (0.11) 0.616*** (0.11)
of Capita(a)
b 0.865*** (0.05) 0.196 (0.17) 0.869*** (0.11) 0.339** (0.17) 0.738*** (0.08)
D lnðSgt Þ 0.085 (0.07) 0.553*** (0.14) 0.255*** (0.10) 0.136*** (0.04) 0.480*** (0.10)
D lnðSgt1 Þ 0.251*** (0.08) 0.401*** (0.11) 0.352*** (0.08)
D lnðOpent Þ 0.040 (0.03) 0.013 (0.08) 0.026 (0.03) 0.036 (0.04) 0.123*** (0.03)
D lnðOvalt Þ 0.005 (0.02) 0.047 (0.07) 0.213*** (0.07) 0.346*** (0.13) 0.027 (0.04)
D lnðOvalt1 Þ 0.144** (0.06)
D lnðRpt Þ 0.294*** (0.06) 0.009 (0.08) 0.037 (0.05) 0.267*** (0.07) 0.135*** (0.03)
D lnð1 þ inf t Þ 0.082 (0.06) 0.083 (0.07) 0.431*** (0.06) 0.008 (0.08) 0.077 (0.07)
D lnð1 þ inf t1 Þ 0.057 (0.11) 0.311*** (0.09) 0.025 (0.04)
Log likelihood 37.967 24.046 30.373 30.375 29.108
Wald statistic 3,620.36*** 231.81*** 1,454.62*** 703.94*** 1,466.31***
D indicates the first difference operator, and standard errors are reported in parentheses. b is the coefficient of TFP
growth lagged one period.
*, **, and *** denote the significance at 10%, 5%, and 1%, respectively.

capital goods relative to consumption goods, and only had they undergone an obvious
decline in the relative price. Inflation rates seem relatively moderate in the five econo-
mies. South Korea exhibited the highest inflation rate (11.47%). In the state Equation
(5), these variables are measured as year-to-year percentage changes by taking the log
difference transformation multiplied by 100. For the inflation rate, we use the trans-
formation of D lnð1 þ Inft Þ multiplied by 100 instead, since negative inflation rates are
very common in our sample.6
Finally, as shown in Table 2, the augmented Dickey–Fuller (ADF) unit root tests
suggest that we can generally view the variables used in the regressions as being sta-
tionary at the 10% level of significance.

Results
We first investigate the TFP growth performance of the Chinese mainland and the
Four Tigers, and then examine the effects of strategy-related variables on TFP growth.
Table 3 reports the Kalman filter estimation results for the models (4)–(5).7 The
explanatory variables, D lnðXt Þ, are selected according to the general-to-specific
approach based on the minimised Akaike information criterion, considering up to one
lag of each variable in the state equation. For comparison, TFP growth is also esti-
mated using the growth accounting method. The ML estimation results of the growth
accounting Equation (3) for each economy are reported in Table 4.8
 ECONOMIC AND POLITICAL STUDIES 165

Table 4. Estimate results for growth accounting equation.

Economy Chinese Mainland Hong Kong SAR Chinese Taiwan Singapore South Korea
Output elasticity of 0.750*** (0.180) 0.560* (0.292) 0.310** (0.124) 0.260 (0.258) 0.479** (0.206)
capital (a)
Average rate of TFP 0.011 (0.011) 0.010* (0.008) 0.023*** (0.009) 0.024*** (0.006) 0.009 (0.014)
growth(c)
Constant item(c) 0.496 (0.956) 2.798 (2.515) 4.951*** (0.857) 5.467** (2.485) 3.838*** (1.386)
Log-likelihood 77.297 60.473 60.393 55.686 56.127
Wald statistics 1,662.270*** 593.010*** 2,174.920*** 202.250*** 207.210***
Standard errors are reported in parentheses.
*, **, and *** denote the significance at 10%, 5%, and 1%, respectively.

10
8
6
4
2
Percent

0
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
-2
Year
-4
-6
-8
Hong Kong SAR Chinese Taiwan
-10 Singapore South Korea
Chinese Mainland
-12
Figure 3. Growth rates of TFP estimated from the state-space model.

Growth performances of TFP

From the observation Equation (4), we obtain the estimated output elasticity of capital
(a) for each economy shown in the first row of Table 3. All of them are statistically
significant, with a value of 0.715 for the Chinese mainland, 0.673 for Hong Kong SAR,
0.658 for Chinese Taiwan, 0.504 for Singapore, and 0.616 for South Korea.
Figure 3 presents the time-variant rates of TFP growth from the state-space model.
Table 5 reports the decomposition of GDP growth into the contributions of factors
accumulation and TFP growth implied by the two approaches. As shown in Figure 3,
TFP growth rates in the five economies exhibited obvious cyclical variations over the
sample. For the Chinese mainland, the TFP growth was 1.52% on average and
explained 15.75% of GDP growth (Table 5). Such TFP growth performance is relatively
better in the five economies, only inferior to Singapore, which had an average TFP
growth of 1.34%, accounting for 15.87% of GDP growth. For Hong Kong SAR and
Chinese Taiwan, the average TFP growth was nearly zero (0.3% and 0.04%), and its
contribution to GDP growth was very small (3.87% and 0.45%). Most strikingly, the
TFP growth and its contribution were negative in South Korea (–1.67% and –20.2%),
given the remarkable accumulation of physical capital that was considerably faster than
166 J. JIA AND Y. CHAO

Table 5. Decomposition of GDP growth.

Growth accounting State-space model
Share Share Share Share Share Share Share Share
Economy Period of K of L* of TFP of Error of K of L* of TFP of Error
Chinese Mainland 1978–2009 75.01 9.20 11.59 4.20 73.16 10.35 15.75 0.74
Hong Kong SAR 1965–1990 58.13 27.12 12.95 1.81 71.36 20.36 3.87 4.41
Chinese Taiwan 1965–1990 39.31 30.40 25.83 4.46 84.77 14.79 0.45 0.01
Singapore 1965–1990 22.72 48.28 28.37 0.62 45.33 31.33 15.87 7.47
South Korea 1965–1990 75.70 36.81 10.67 1.84 97.54 26.46 20.20 3.80
Shares of K, L*, TFP and Error are expressed as percentages.

its GDP growth. This finding is consistent with the findings of Timmer and van Ark
(2000).
These results confirm previous findings in the literature: TFP growth and its contri-
bution to GDP growth were quite limited in the Chinese mainland and the Four
Tigers. In contrast, these countries’ economic growth relied heavily on physical capital
accumulation, whose contribution was 97.54% for South Korea, 84.77% for Chinese
Taiwan, 73.16% for the Chinese mainland, 71.36% for Hong Kong SAR, and 45.33%
for Singapore.
It is important to note that the growth accounting results are obviously different,
particularly for the Four Tigers: The output elasticity of capital (a) is much smaller,
as shown in Table 4, and TFP growth and its contribution are obviously larger in
absolute value. However, Table 4 shows that the capital elasticity is not statistically
significant for Singapore, and that neither is the parameter c in the cases of the
Chinese mainland and South Korea. This result implies that one or more assump-
tions underlying the growth accounting method may be violated for these econo-
mies, thus yielding misleading results. In addition, the assumption that TFP grows
at a constant rate over long periods is also unreasonable. Hence, the results from
the state-space model should be more accurate, as indicated by Fuentes and
Morales (2011).

Determinants of TFP growth

Why has TFP growth performance for the Chinese mainland and the Four Tigers been
so poor? More specifically, what is the role of the growth strategies pursued by these
economies in their TFP growth performances? We now examine these questions.
The parameter b reported in Table 3 corresponds to the estimate for the coefficient
of TFP growth lagged one period in the state equation (5). For each economy (except
Hong Kong SAR), the coefficient is statistically significant. It is also quite large in the
cases of the Chinese mainland, Chinese Taiwan, and South Korea, suggesting that TFP
growth exhibited significant inertia in these economies.
For the Chinese mainland, the coefficient of D lnðSgt Þ is negative (–0.085) but not
statistically significant, while the coefficient of D lnðSgt1 Þ is positive (0.251) and statis-
tically significant. This result implies that the cumulative multiplier of government
expenditure with respect to TFP growth is 1.23.9 Thus, government interventions in
the Chinese mainland help promote a long-run TFP growth. The effects of government
expenditure on TFP growth portray a similar picture for Chinese Taiwan, with a
 ECONOMIC AND POLITICAL STUDIES 167

cumulative multiplier of 1.115. In contrast, the government expenditure has a negative

and statistically significant effect on TFP growth either in the current period or in the
long run, for Hong Kong SAR, Singapore, and South Korea. These findings may be
attributed to the fact that the shares of government expenditure were quite low in the
three economies (Table 1).
Trade openness exerts a positive effect on TFP growth for the Chinese mainland,
Hong Kong SAR and Chinese Taiwan, as expected, while it has a negative effect in
Singapore. However, all of the effects are not statistically significant. Hence, although
economists have emphasised the importance of trade openness in explaining the
growth miracles of the five economies, it does not seem to have delivered any signifi-
cant productivity and efficiency bonuses. Moreover, trade openness even shows a nega-
tive and statistically significant association with TFP growth in South Korea. One
possible explanation for these findings is that trade-opening policies in the Chinese
mainland and the Four Tigers have been characterised by strong export-oriented incen-
tives (with an undervalued currency and a variety of tax incentives). These incentives
reduce the pressure for technical upgrades of production and induce rapid expansions
of the output of low value-added and low-technology production. In consistence with
this notion, the undervalued exchange rate does not show any statistically significant
effects on TFP growth for the Chinese mainland, Hong Kong SAR and South Korea,
and even hinders TFP growth in Chinese Taiwan and Singapore. These results are
quite different from the findings of Thomas and Wang (1996) and Miller and
Upadhyay (2000). However, they are consistent with the findings of Collins, Bosworth,
and Rodrik (1996) and Jeanneney and Hua (2003).
The coefficient of D lnðRpt Þ is negative, as expected. But, it is not statistically signifi-
cant for Hong Kong SAR and Chinese Taiwan. For the other three economies, a
decline in the price of capital goods relative to consumption goods is significantly asso-
ciated with a slowdown in TFP growth. Thus, there is no clear evidence for invest-
ment-specific technological progress in the Chinese mainland and the Four Tigers
during their high-growth periods. In other words, the five economies obtained no sig-
nificant productivity gains from the rapid growth of investments. This phenomenon
may be related either to the poor capacity of these economies to learn and implement
new technology embodied in new equipment because of the lacks of skilled labour, or
to low efficiency of investment and low quality of capital.
Finally, no statistically significant association exists between inflation and TFP
growth for the Chinese mainland, Hong Kong SAR, and South Korea. In contrast,
higher inflation hinders TFP growth for Chinese Taiwan and Singapore. Therefore,
macroeconomic volatility weakens the ability of these two economies to sustain eco-
nomic growth.

Conclusion
This paper compares TFP growth performance for the Chinese mainland and the Four
Asian Tigers during their high-growth periods and examines the role that growth strat-
egies pursued by these economies played in determining TFP growth. Specifically, the
state-space model in which TFP growth is treated as a latent variable is applied for
each economy using the Kalman filter.
168 J. JIA AND Y. CHAO

Our results show that TFP growth and its contribution to economic growth were
quite limited in the Chinese mainland and the Four Tigers during their takeoff stages,
which is mainly attributed to their growth strategies. The price of capital goods relative
to consumption goods shows no statistically significant effects on TFP growth for
Hong Kong SAR and Chinese Taiwan. Moreover, the decline in this relative price is
significantly related to a slowdown in TFP growth in the Chinese mainland, Singapore
and South Korea. Thus, no evidence exists for investment-specific technological pro-
gress in Chinese mainland and the Four Tigers. That is, the rapid growth of invest-
ments failed to deliver significant productivity bonuses in the five economies. Similarly,
no significant gains in productivity and efficiency arise from trade openness and an
undervalued currency in these economies. Trade openness even hinders TFP growth in
South Korea, as the undervalued exchange rate does for Chinese Taiwan and
Singapore. We also find that government interventions, as measured by the share of
government expenditure to GDP, encourage TFP growth in the long run for the
Chinese mainland and Taiwan, but that government interventions hinder it for the
other economies. Macroeconomic instability, with higher inflation, reduces TFP growth
in Chinese Taiwan and Singapore.
These results have important policy implications for long-term sustainable growth,
particularly for the Chinese mainland. A similar growth strategy, characterised by a
high investment rate, rapid opening of trade, strong export orientation and active gov-
ernment intervention, has been widely thought of as a key driving force behind
remarkable economic growth of the Chinese mainland and the Four Tigers during
their takeoff stages. However, such a growth strategy also appears to be a major source
of the poor performance of TFP growth in these economies. Given the collapse of the
economic growth of the Four Tigers, it is necessary for the Chinese mainland to
change its growth strategy to avoid a similar collapse. Significant reform efforts should
be made to reduce the heavy dependence on the high investment rate and export by
encouraging greater consumption. More importantly, the Chinese mainland should
take effective measures to improve the efficiency of investment and the quality of cap-
ital and to encourage technical upgrades and shifting of export structure towards more
sophisticated high-technology products. Of course, such alternatives are challenging
and involve many short-term costs, but they are very critical for the long-term sustain-
able economic growth of China. Finally, the Chinese mainland should increase govern-
ment expenditures on R&D, education, training and health services, since such
expenditures have turned out to be important to improve productivity.

Notes
1. For reviews on the TFP growth estimates for China, see Tian and Yu (2012). In the
literature on economic growth, TFP was widely used to measure technological progress
and efficiency gains, thus it plays a central role in assessing growth performance and the
sustainability of economies in the long run(Easterly and Levine 2001).
2. Thomas and Wang (1996) and Collins, Bosworth, and Rodrik (1996) investigated the TFP
growth effects of government interventions and economic distortions by running a
regression of TFP growth, which is estimated using the growth accounting method in a
first step, on these variables in a second step. However, the growth accounting method has
 ECONOMIC AND POLITICAL STUDIES 169

a couple of caveats and, thus, an incorrect estimate from the first step could invalidate the
conclusions obtained from the second-step regression.
3. In the existing studies, TFP growth is often assumed to follow an AR(1) process (Fuentes
and Morales 2011). Clearly, an ARMA (1, 1) process is more general compared with an
AR (1) process.
4. The depreciation rate is also set at 4%, as in Sarel (1996). Our results are insensitive to
this change.
5. Young (2003) found that the growth of human capital stock in the non-agriculture sector
of the Chinese mainland wasalmost constant during the period 1978–1998.
6. After the log difference transformation, the correlation among these explanatory variables
is mostly negligible for each economy.
7. The estimate results turn out to be robust for different initial guesses of the parameters
among the reasonable ranges. The log-likelihood function is maximised using the
Berndt–Hall–Hall–Hausman (BHHH) algorithm under the assumption of Gaussian errors.
In addition, we require data on the Four Tigers as far back as the 1960s, and few long
data series are available. Thus, some potential factors that determine TFP growth may be
omitted from the model. However, the Jarque–Bera tests show that the residuals are very
close to normality, indicating that this problem should not be serious.
8. The Wald tests show that the assumption of constant returns to scale cannot be rejected at
the 5% level of significance for each economy.
9. By the long-run cumulative multiplier, we mean the sum of current and lagged coefficients
of each variable divided by (1b).

Disclosure statement
The authors report no conflicts of interest. The authors alone are responsible for the content
and writing of this article.

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