Essays on economic growth and human development in Asia

This thesis contains three essays on the macroeconomic performance of Asian economies. Chapter 2 studies the sources of growth in Asian economies using a growth accounting model. We contribute to the existing debate on the role of factor accumulation and Multi Factor Productivity (MFP) growth in Asian economies. Our findings indicate that overall, MFP growth accounted for around 0.8% of the growth in output from 1960 to 2010. The estimated contribution of MFP growth to output growth varies from 3.1% per annum in Taiwan to -3.0% in Bangladesh over the same period. Our growth accounting estimates show that both accumulation and assimilation were important sources of rapid growth in South Asia, East Asia and China between 1980 and 2010. MFP growth has been much higher in this period as compared to 1960-79. We interpret this result as an indication of the regional economies being at an initial stage of development during 1960s and 1970s. Our findings point to a strong association between a country‟s productivity and a country‟s absorptive capacity. We suggest that at initial stage of development factor accumulation is the main driver of growth. However, MFP growth increases with the general development of the economy as absorptive capacity improves. The contribution of human capital has been positive as suggested by the new growth theory but moderate in magnitude. East Asia is at a higher ladder of development due to its better human capital accumulation. We do not find empirical support for Krugman hypothesis which states that output growth dominated by physical capital accumulation is short lived and not sustainable. Our findings provide the evidence that growth in Asian economies is sustainable. However, South Asia needs to increase existing investment levels in order to accumulate physical and human capital. Policy should give a high priority to human capital accumulation in China. Asia's spectacular economic growth is accompanied by large investments in education and the region enjoys sound institutional environment especially in East Asian countries. Thus, Chapter 3 examines the impact of human capital and governance on Average Labour Productivity (ALP) and MFP growth in 14 Asian countries over the 1966-2010 period. We compare the performance of a Cobb-Douglas function with a more structural specification that accounts for the distance of countries from the technological frontier. Our results show that a 1% increase in aggregate human capital is associated with approximately a 0.4% increase in ALP and MFP growth, implying that there are internal as well as external returns to human capital accumulation. The effect is larger for primary educated workers (0.4%) and gradually decreases for secondary (0.2%) and tertiary educated workers (0.1%). For tertiary educated workers we find that their impact increases the closer a country is to the technological frontier. This shows that different types of skills are important at different levels of development and, while increasing investment into basic education will greatly affect the growth perspectives of the area, investments in tertiary education are important to speed up the catching-up process. The positive and significant impact of human capital remains intact even after controlling for the inclusion of governance indicator in our specification. We find that higher quality institutions positively affect ALP growth but they are insignificant for MFP growth, indicating that only human capital can generate spillover effects. While policy makers and international development organisations emphasize the role of openness to trade in achieving sustained economic growth as well as better human development, the simultaneous links between openness, economic growth, and human development are not well studied. In Chapter 4, we empirically examine these interactions through simultaneous equation system using three stages least squares to account for endogeneity of variables. The results suggest that in Asia (i) openness has a strong positive impact on both economic growth and human development, (ii) human capital and FDI have a strong positive effect on both economic growth and human development, and (iii) while human development contributes positively to growth, growth has a negative and significant influence on human development. Our findings confirm the success of trade liberalisation policies in the region in achieving higher growth only. However, this seems to have had negative implications on distribution of income and thus has impeded human development. Therefore, there is a need to focus on improving human development along with growth in order to sustain development.