Estimates of Multifactor Productivity, ICT Contributions and Resource Reallocation Effects in Japan and Korea

Author Name FUKAO Kyoji  (Faculty Fellow, RIETI) /MIYAGAWA Tsutomu  (Faculty Fellow, RIETI) /Hak K. PYO  (Seoul National University) /Keun Hee RHEE  (Korea Productivity Center)
Creation Date/NO. May 2009 09-E-021
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As the studies of Krugman (1994), Young (1994), and Lau and Kim (1994) showed, the East Asian economic miracle may be characterized as 'input-led' growth. However, both the stagnation in investment and the decrease in average working hours combined with a decrease in the fertility rate require a productivity surge for renewed, sustainable growth in East Asia. The purpose of our study is to identify the sources of economic growth based on a KLEMS model for Japan and the Republic of Korea, which experienced a 'Lost Decade' and a financial crisis in 1997-1998, respectively. We report estimates of multifactor productivity in the market economy of Japan and Korea based on the dataset of a 72-industry classification following EU KLEMS project guidelines. We also identify the contributions of ICT assets and resource reallocations in two economies. Both economies have strong ICT-producing sectors but relatively weaker ICT-usage effects. Lower productivity in service industries due to excessive regulations and lack of competition in public service sectors seem to have worked against enhancing ICT-usage effects and finding renewed sustainable growth paths. The resource reallocation effects of capital input in both Japan and Korea were either negligible or insignificant, while those of labor input (the labor shift from lower wage industries to higher wage industries) were positive and significant. Therefore, a series of productivity-enhancing policies designed to promote reallocation of capital input seems crucial for both economies to resume sustainable growth paths.