A Neoclassical Analysis of the ASEAN and East Asian Growth Experience

Abstract

This study examines the growth experience of the ASEAN and East Asian countries from a neoclassical perspective. Using data from 1960-94 for Indonesia, Malaysia, the Philippines, Thailand, Hong Kong, South Korea, Singapore, Taiwan and Japan, the neoclassical proposition of conditional convergence was evaluated. The speed of convergence of ASEAN and East Asian countries to their respective steady state levels of per capita GDP, conditional on the initial endowment of the physical and human capital, is estimated at 4.8 per cent per year. This result indicates that, were the poor countries of the ASEAN community to attain levels of physical and human capital investment, rates of savings, productivity growth, and population growth similar to those of the rich countries, per capita incomes in the former would grow significantly faster than those in the latter 1. Introduction Will the developing countries eventually catch up with the income levels of the industrialized economies? What can the poor countries do to join the ranks of the high income economies? How can growth be sustained? Many economists have studied such issues, and this study focuses on the dynamic Asia-Pacific region. In particular, it seeks to examine the growth experience of the ASEAN and East Asian economies' from a neoclassical perspective. This study considers the growth experience of these economies in the 1960-90 period as a transitional process of economic development due to changes in both comparative and competitive advantage. We examine whether the poorer economies are catching up with the rich economies in the region, thereby showing signs of conditional convergence in their income levels. The presence or absence of growth convergence will undoubtedly provide policy implications with respect to the role of technology, education and government in economic development. The article is organized as follows. In section 2, the theoretical background is briefly reviewed and the definitions of convergence are stated. It will also include a review of empirical works done recently on the subject. An overview of the ASEAN and East Asian growth experience is provided in section 3. Beginning with a preliminary investigation on convergence among nine economies, section 4 follows the Barro and Sala-i-Martin approach in modelling and testing the existence of conditional convergence. Section 5 explores the policy implication of the findings and concludes the article. 2. The Neoclassical Growth Model2 Robert Solow (1956) and Swan (1956) provided the most basic version of the neoclassical theory of growth. The neoclassical model emphasizes how growth arises from the accumulation of capital. Starting from a linear homogenous production function, the capital stock per efficient labour unit, k, evolves according to: The neoclassical model implies that countries with similar production technologies, resource endowment, time preference of consumption as well as comparable saving and population growth rates should converge to similar steady state levels of per-capita income.' This convergence property means that poor countries starting with a relatively low standard of living and a lower capital/ labour ratio will grow faster during the transition as they catch up with the rich countries, but ultimately both groups will arrive at the same level of per capita income. The transition dynamics implied by equation 1 are plotted in Figure 1. The downward sloping curve depicts the rate of growth in the country's capital stock as a function of the capital per effective unit of labour, while the line parallel to the horizontal axis shows the growth rate of the effective labour force.' The vertical differences () between the two curves show the growth rates of the k or a constant multiple of the growth rates y. Figure 1 illustrates two economies with the same steady state, k*. The further it is from the steady state, k*, the higher is the growth rate of k in the transitional period. …