Diminished returns? Growth and investment in East Asia

This paper investigates the investment-led growth hypothesis for the newly industrialized economies of East Asia. Using numerical simulations and a neoclassical model, it is shown that the revolution in investment rates only explains about 30 per cent of the growth of GDP per worker. In contrast, productivity growth and improvements in labour quality, explain around half the growth of GDP per worker. This reflects the effects of productivity growth on capital accumulation. Contrary to recent growth-accounting studies, the results suggest that understanding the sources of productivity growth in East Asia will provide the most useful lessons for other developing economies.