Estimates of future Economic Growth in Asia

1. Estimates of future Economic Growth in Asia If we start with a simple Solow growth model we have y=(ls)h + (1-ls) k + a Where k is the rate of growth in the capital stock, y is rate of growth in income, h is the rate of growth of the labor force adjusted for improved quality of higher education and better health, a is Total Factor Productivity and ls is the share of labor in total income. Assuming that the capital to output ratio is fixed in the short run we have y = h + a/ls

2. Estimates of future Economic Growth in Asia Since y=(ls) h + (1-ls) y + a Because y=k, the rate of growth in income and capital are the same since the capital to output ratio is constant. Then y= (ls) h +y – (ls)y +a y-y + (ls)y = (ls) h +a (ls)y = (ls) h +a y = h + a/(ls)

3. Estimates of future Economic Growth in Asia Growth in income is the sum of labors share in income and capitals share in income plus total factor productivity By looking at historical values for h, a and ls we can establish a benchmark rate of growth the seems plausible for the future. The growth in income has to be matched by enough investment on the supply side to sustain growth. From the simple Harrod – Domar model we have Y = s/k –d where s is the saving rate and d is depreciation. We can make some additional assumptions about s and d and come up with some plausible scenarios about the future path of growth in Asian economies.

4. Estimates of future Economic Growth in Asia These assumptions are worked thru in various tables in Chapter 1 (Future Perspectives) in Future Prospects on the Economic Development in Asia. In summary long run growth from the demand side are compared with long run growth from the supply side in Tables 1.21 and Table 1.22 and Table 1.23. It turns out that the saving rate needed to sustain the demand side estimates are LOWER than the actual rates of saving in Asia.

5. Estimates of future Economic Growth in Asia This suggests that resource mobilization has not been a constraint in Asian economies. This observation is confirmed by the rapid accumulation of foreign exchange reserves in many countries in the Asian region over the past few years. Of course there are many variables involved in these calculations. The point of the exercise is to raise our awareness of the major factors contributing to growth.

6. Estimates of future Economic Growth in Asia These factors provide insights into growth prospects for Asian economies. • Labor force growth declines • TFP slows as leverage from shifting from agriculture to industry dissipates. • There will be diminishing returns to scale as the amount of capital per worker continues to growth. • Saving and investment rates may fall as consumption rises as a proportion. This has happened in industrial western countries. It doesn’t seem to be happening as rapidly in Asia. • All of these factors will eventually result in a natural reduction in sustainable long term growth rates.

7. Challenges to raise output and productivity To offset these tendencies economies have to become more efficient in the use of resources and adopt new technology and better trained manpower. Health and education could bring added growth as the augmented labor force variable h plays a larger role in growth. Technology transfer and business skills could be raises as a result and poverty can be reduced further as labor productivity is being raised. New technology would result in an upward shift in the production function.

8. Challenges to raise output and productivity Corruption and poor governance could slow growth event though they don’t enter into the growth equations directly. They do, however, impact on growth indirectly through reduced efficiency of resource allocation. Foreign direct investment and export promotion will continue to be crucial in the future. EPZs in South Asia and the the Mekong countries might be able to make a more significant contribution to rapid growth in the next decades.