One Industry at a Time: Evidence of Induced Localized Technical Gains in the East Asian Countries

Abstract

This paper argues that technical change in the East Asian countries was sector-specific, took the form of learning-by-doing and was induced by relative factor prices. Usual growth accounting exercises do not account for this in the structure of the assumed aggregate production function and therefore miss these technical gains. Assumed or estimated elasticities of substitution are too high in these studies. Calculations of elasticities using factor prices are more consistent with localized technical gains in Korea, Singapore and Taiwan. I find evidence that the technical change may have been induced by policy and macroeconomic shocks affecting relative factor prices. Plant-level TFP growth calculations using the Korean Industrial Census further support the hypothesis offered here.

Keywords: Total Factor Productivity, Induced Technical Gain, Economic Growth, East Asia

JEL Classification: O47, O53, O31