Industrial Structure Changes and the Measurement of Total Factor Productivity Growth: The Krugman-Kim-Lau-Young Hypothesis Revisited

Abstract

By considering the effect of industrial structural change, this paper provides a new methodology to measure the total factor productivity (TFP) of n economy The major conclusions are as follows: (1) Ignoring the effect of industrial structural changes underestimated the TFP growth of the whole economy of Taiwan by 23.23 percent from 1961-1980 and overestimated the TFP growth by 23.94 percent from 1980-1999. It is therefore important to consider the effect of industrial structural changes to measure the TFP growth correctly. (2) The Krugman-Kim-Lau- Young ”input-driven growth” hypothesis for the NIEs is without basis, as demonstrated not only in this study but that of Liang (2002) and Young (1994b). (3) The factors that explain the effect of industrial structural changes from 1970-1999 include government industry and liberalization policies. Moreover, the government plays an important role in promoting saving and investment. These conclusions differ with the argument offered by Krugman (1994) on the uselessness of macro and industry policies in the economic development of the NICs.