Trajectories to high income: Comparing the growth dynamics in China, South Korea, and Japan with cointegrated VAR models

Abstract

We analyze and compare the patterns of economic growth and development in China, South Korea, and Japan in the post-war period. The geographical proximity and cultural affinity between the three countries, as well as the key role of the development state in their economies, suggest that an analytical comparison would be a meaningful and valuable exercise. Furthermore, South Korea and Japan are two of the few economies that have jumped from middle income to high income in a short period and thus offer potentially valuable lessons for China. We use Cobb–Douglas production functions to assess the long-run equilibrium relationships between per capita GDP, capital, and labor by means of cointegrated vector autoregressive (CVAR) models. We show that such equilibrium relationships cannot be rejected for all three countries, while the evidence is stronger for China and South Korea than for Japan. Our hypothesis tests show that the estimated Cobb–Douglas production functions display coefficients of capital and employment that sum up to 1 and broken linear trends that can be attributed to structural breaks and (changes in) total factor productivity (TFP) growth. We observe a striking similarity between the experience in South Korean and China, which gives some optimism that the China may be capable of graduating to high income, like South Korea.