Abstract

We analyze and compare the patterns of economic growth and development in the Japan, the People’s Republic of China, and the Republic of Korea in the postwar period. The geographical proximity and cultural affinity between the three countries, as well as the key role of the development state in the economies, suggest that an analytical comparison would be a meaningful and valuable exercise. Furthermore, Japan and the Republic of Korea 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 the PRC. We use Cobb–Douglas production functions to assess the long-run equilibrium relationships between per capita gross domestic product, capital, and labor by means of cointegrated vector autoregressive models. We show that such equilibrium relationships cannot be rejected for all three countries, while the evidence is stronger for the PRC and the Republic of 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 growth. We observe a striking similarity between the experience in the Republic of Korea and the PRC, which gives some optimism that the PRC may be capable of graduating to high income, like the Republic of Korea.

Highlights

  • Since the introduction of market reforms in 1978, decades of world-topping economic growth have transformed the People’s Republic of China (PRC) into the world’s second-biggest economy and an upper-middle-income economy

  • We use Cobb–Douglas production functions to assess the long-run equilibrium relationships between per capita gross domestic product, capital, and labor by means of cointegrated vector autoregressive models. We show that such equilibrium relationships cannot be rejected for all three countries, while the evidence is stronger for the PRC and the Republic of Korea than for Japan

  • We find that the long-run evolution of per capita gross domestic product (GDP), capital stock, and employment in the PRC can be reconciled with Cobb–Douglas production functions, which is the first notable result

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Summary

Summary of Potential Structural Breakpoints

Residual Analysis—Diagnostic Testing of the Unrestricted Vector Autoregression (1) Model, People’s Republic of China. The Just-Identified Long-Run Cointegration Relations for r = 1, People’s Republic of China 16. The Overidentified Long-Run Cointegration Relation for r = 1, People’s Republic of China 16. Likelihood-Ratio Trace Test for the Unrestricted Vector Autoregression (1) Model, Republic of Korea. The Just-Identified Long-Run Cointegration Relations for r = 1, Republic of Korea. The Overidentified Long-Run Cointegration Relations for r = 1, Republic of Korea (1) Model, Japan. 10 Likelihood-Ratio Trace Test for the Unrestricted Vector Autoregression (1) Model, Japan 26

INTRODUCTION
LITERATURE REVIEW
Developing Theoretical Hypotheses
Data Description and Historical Events
Univariate Properties of the Data
Structural Break Tests
Econometric Framework
Estimation
Analysis for the People’s Republic of China
1.00 TREND = 0
Republic of Korea
Analysis for Japan
CONCLUSION
34 Appendix
Findings
40 References
Full Text
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