The views expressed in this presentation are the views of the author and do not necessarily reflect the

views or policies of the Asian

Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent.
ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their
use. Terminology used may not necessarily be consistent with ADB official terms.

Koreas Economic Growth and Catch-up:

Implications for China
ADBI 18th Annual Conference
3 December 2015

Jong-Wha Lee
Korea University

Based on Lee, J.W., Koreas Economic Growth and Catch-up: Implications for China,
working paper, 2015

Outline
I.

Introduction

II.

Koreas Economic Growth and Catch-up

Growth and Catch-up Process

Sources of Economic Growth

Structural Change and Sectoral Productivity

III.

Implications for Chinas Sustained Growth

I. Introduction

Motivation (1): Can China Sustain Growth?

GDP growth rate
(year-over-year percent change)
9.0

Mean

8.5
8.0

Max

GDP growth by industry

Min

Forecast

7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0

Note: GDP= gross domestic output

Source: Bloomberg

Source: CEIC, ANZ Research

Motivation (2): Will China Continue to Catch-up?

Per capita GDP

Note: Data are per capita GDP at chained PPP-adjusted international dollar and are
expressed in a proportional scale .
Source: Penn World Table 8.1 (Feenstra, Inklaar,and Timmer 2013).

Motivation (3): Will China Follow the Experiences of

Japan and Korea?
Per capita income level and growth rates of Korea, Japan,
and China relative to the US

CHINA

KOREA

JAPAN

Note: The figure shows the period average of relative per capita income and its growth rates over the
corresponding 5 years. 60 indicates 19601964,, and 10 indicates 20102014.
Source: Authors estimates based on data from Penn World Table 8.1 (Feenstra, Inklaar,and Timmer,
2013) and the IMF, World Economic Outlook Database, October 2015 for 20122014

II. Koreas Economic Growth and Catch-up

Output Per Worker and its Components: Ratio to US

Country

Korea

Japan

China

Year

Per Worker
Output

1970
1980
1990
2000
2010
1970
1980
1990
2000
2010
1970
1980
1990
2000
2010

0.13
0.23
0.40
0.55
0.61
0.43
0.62
0.72
0.72
0.69
0.05
0.05
0.06
0.08
0.15

Physical
Capital
Per Worker
0.12
0.17
0.29
0.52
0.79
0.31
0.63
0.77
1.00
1.01
0.02
0.03
0.04
0.08
0.18

Human Capital
Per Worker

Total Factor
Productivity

0.59
0.70
0.83
0.90
0.98
0.74
0.78
0.85
0.90
0.94
0.35
0.43
0.48
0.57
0.60

0.24
0.37
0.53
0.68
0.64
0.63
0.81
0.86
0.79
0.72
0.24
0.20
0.18
0.23
0.37

Koreas Catching-up with the US

Change in the gap of per worker output and its
components between Korea and the US, 19602010

Major Findings from Development Accounting

The gap of per worker output between Korea and the U.S.
has rapidly decreased over the period of 1970-2000.
The swift catch-up process is for the most part attributed
to physical and human capital accumulation rather than
total factor productivity growth.
The pace of Koreas catch-up slowed after 2000. This is
attributed mainly to little gain in productivity catch-up
during 20002010.
The catching-up speed is expected to slow down as Korea
now faces a much smaller gap in physical and human
capital stock from their long-run potential levels and
technology level is also closer to the world frontier.

Trend in Investment Rate

Investment rates

Source: Penn World Table 8.1 (Feenstra, Inklaar,and Timmer 2013).

11

Cross-country Panel Regressions for Per Capita

GDP Growth Rate, 1960-2010
Variable
Log (per capita GDP)

Coeff.

(S. E.)

-0.0167*** (0.00217)

Investment/GDP

0.0388**

(0.0169)

Log (total fertility rate)

-0.024***

(0.0046)

Average years of schooling

-0.00307

(0.00190)

Average years of schooling^2

0.00022*

(0.00013)

1/Life expectancy

-2.551***

(0.677)

Trade openness

0.00531*

(0.00319)

Government consumption

0.00105

(0.0130)

0.0171***

(0.00599)

-0.0116

(0.00981)

Democracy index

0.0534***

(0.0186)

Democracy index^2

-0.053***

(0.017)

Terms of trade change

0.0798***

(0.0270)

No. of country; No. of obs.

73; 713

Rule-of-law index
Inflation rate

12

Contributions to Growth Differentials between

Korea and the US

Difference in
actual Growth

Contributions to the difference in per worker

GDP growth of Korea relative to the US
19601980 19802000
20002010

predicted Growth

0.0395
0.0123

0.0387
0.0232

0.0294
0.0268

(100.0%)

Initial income
Investment rate
Fertility
Schooling
Life expectancy

0.0309
0.0025
-0.0117
-0.0038
-0.0054

0.0196
0.0049
0.0021
-0.0044
-0.0022

0.0112
0.0043
0.0126
-0.0020
0.0003

(41.5%)
(16.2%)
(47.0%)
(-7.3%)
(1.2%)

0.000003
-0.0086
-0.0010
0.0112
0.0009
0.000002

0.000003
-0.0076
-0.0002
0.0097
0.0016
-0.0003

0.000021
-0.0020
-0.0001
0.0031
0.0020
-0.0026

(0.1%)
(-7.4%)
(-0.3%)
(11.4%)
(7.3%)
(-9.6%)

Government consumption
Rule of law
Inflation rate
Democracy
Openness
Terms of trade

13

Structural Changes in Asia and the US

Employment share by industry, 19802010 (%)
Agriculture

Services

Manufacturing

14

Relative Labor Productivity by Sector

Ratio of Each Sectors Per Worker Value Added to
Manufacturing Per Worker Value Added in 2010
Korea

Japan

China

US

Agriculture, hunting, forestry, and fishing

0.24

0.22

0.18

0.55

Manufacturing

1.00

1.00

1.00

1.00

Services

0.48

0.94

0.64

0.64

Wholesale and retail trade, hotels, and restau

rants

0.25

0.60

0.56

0.38

Transport, storage, and communications

0.61

1.00

1.06

0.83

Finance, real estate, and business services

0.83

1.55

1.79

1.25

Community and government services

0.47

0.84

0.31

0.48

0.74

0.95

0.83

0.82

Mining and quarrying

1.99

1.14

1.82

2.44

Electricity, gas, and water

3.64

6.41

2.70

2.90

Construction

0.59

0.72

0.50

0.48

0.58

0.91

0.58

0.68

Industry

Others

Aggregate Economy

Source: Authors estimates from WORLD KLEMS Database (US), ASIA KLEMS Database (Korea, Japan),
and CIP 3.0 Database (China).

15

Sectoral Growth Rates in Korea, 1981-2010

Growth Rate of Per Worker Value Added by Sector (%)
Agriculture

Manufacturing

Services

Others

12
9.94

10
8

7.02

7.58

5.54

5.47

5.58
4.73

4
2.45

2
0

1.22

19811990

2.09

19902000

1.13

1.2

20002010

Source: Authors estimates based on ASIA KLEMS Database.

16

Major Findings from Cross-country Regression

and Sectoral Analysis

The strong growth of Korea over the past half century

confirm the conditional convergence effect.
Korea has had favorable conditions for rapid growth by
maintaining strong investment, low fertility, high trade
openness, and macroeconomic stability, and by improving
the quality of human resources and institutions continuously.
Improvement in democracy tends to slow the pace of the
catch-up.
The recent growth slowdown of Korea reflects its diminishing
mid-term and long-term growth potentials due to
convergence and structural factors.
While manufacturing- and export-oriented development
served Koreas success well, poor productivity performance
in the services sector has hampered overall growth.

III. Implications for Chinas Sustained Growth

Implications for China

The strong growth of China over the past decades is associated

with strong catch up in physical capital accumulation rather than
productivity growth.
China still has significant room to catch up to the advanced
economies by factor accumulation and productivity growth.
China have had favorable conditions including strong investment,
abundant human resources, and macroeconomic stability.
The recent growth slowdown of China reflects its diminishing
potentials due to convergence.
Chinas average potential GDP growth will decline to
approximately 5~6% over the coming decades, unless it
significantly improves institutions and policy factors.
The future of Chinas growth hinges on policies to promote
continuous technological innovation and industrial upgrading that
could contribute to productivity increases in both the
19
manufacturing and services sectors.

Future of the PRCs Growth - Conditional Convergence

China
(percent)

10

9.4

9
8
7
5.5

6
5
4
3
2
1
0

1980-2007
Capital

Labor

2011-2030
Education

Total factor productivity

Notes: The figures show the contribution to average GDP growth rate by each growth component. The figures for 2011-2030 are the projections
based on cross-country panel regressions for each growth component.
Source: Lee, J. and K. Hong, Economic Growth in Asia: Determinants and Prospects, Japan and the World Economy, March 2012

20

Can China Overcome Challenges?

Slower pace of convergence and catch up

Rebalancing sources of growth

Financial and fiscal weaknesses

Reform of state-owned enterprise

Population aging

Inefficient government interventions

Building more innovative capabilities

Reduce disparities across provinces and income groups

Maintaining social and political stability

21

Sectoral Growth Rates in China

Growth Rate of Per Worker Value Added by Sector (%)
Agriculture

Manufacturing

Services

Others

25
19.51

20

14.54

15
10.64

10

5.78

4.14

2.73

2.34

0
-0.7 -1.31

-5

19811990

-1.33

4.78

-0.19

19902000

20002010

Source: Authors estimates based on CIP 3.0 Database

22

Rapid Population Aging in China

Working-age Population and
Dependency Rate, China
(% in total population)

(% in working-age population)

Share of population 60+

45

(percent)

China

Working-age population(LHS)

40

India

Dependency rate (RHS)

35

Japan

30

Korea, Rep.
U.S.

25
20
15
10

Source: UN, World Population Prospects: The 2012 Revision

1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040

Source: UN, World Population Prospects: The 2012 Revision

23

Reform of Chinas State-Owned Enterprises

Industrial enterprises: SOEs
(In percent of total)

Leverage ratios

Liabilities
(In percent of GDP)

Return on assets
(In percent)

(In percent)

Source: IMF, Peoples Republic Of China 2015 Article IV ConsultationStaff Report; Press Release; and Statement By The Executive Director For The
Peoples Republic Of China, August 2015

24

What Will Happen to Democratization in China?

Democracy Index, 1960-2013

Note: The democracy index is the Polity indicator, which is constructed as democracy less autocracy (converted from a -10 to +10
scale to a 0-1 scale, with 1 representing the highest level of democracy).
Source: Polity IV Project (www.systemicpeace.org)

25

Thank You
Jong-Wha Lee

E-mail: jongwha@korea.ac.kr
Tel.: +82-2-3290-1600