Transition dynamics in the neoclassical growth model: the case of South Korea
-
Yongsung Chang
and
Andreas Hornstein
Abstract
Many successful examples of economic development, such as South Korea, exhibit long periods of sustained capital accumulation. This process is characterized by a gradually rising investment rate along with a moderate rate of return to capital, both of which are strongly at odds with the standard neoclassical growth model that predicts an initially high and then declining investment rate with an extremely high return to capital. We show that minor modifications of the neoclassical model go a long way toward accounting for the capital accumulation path of the South Korean economy. Our modifications recognize that (i) agriculture (which makes up a large share of the aggregate economy in the early stage of development) does not rely much on capital and (ii) the relative price of capital declined substantially during the transition period.
Acknowledgments
We would like to thank the referees and discussants and participants at various conferences and seminars, in particular, Francesco Caselli, Jang-Ok Cho, Seijik Kim, Yongjin Kim, Kyoungmook Lim, Jong-Wha Lee, Jaewoo Lee, Diego Restuccia, and Kei-Mu Yi. Kangwoo Park has provided excellent research assistance. Any opinions expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.
Appendix: Description of data
Our two main data sources are the Groningen Growth and Development Centre (GGDC) for employment-related series and the Bank of Korea for National Income Accounts-related series. Some of the NIA series start as early as 1953, but most series are available only from 1960 to 2011. We therefore perform our growth accounting exercise for the period 1960–2011.
We obtain data on Korea’s population, total employment, average annual hours worked per employed person, and an index of human capital per person from the Penn World Table Version 8.0 (Feenstra, Inklaar, and Timmer 2013). The human capital index is based on years of schooling and returns to education. Average hours worked per person are available only from 1963 on, and we set the 1960–1962 values to the 1963–1970 average. We calculate the share of employment in the agricultural sector (agriculture, forestry, and fishing) from the Groningen Growth and Development Centre’s (GGDC) 10-Sector database, (Timmer, de Vries, and de Vries 2014) for the years 1963–2010, and from the OECD Labor Force Statistics (downloaded from Haver) for the years 2010–2013. We splice the OECD series to the GGDC series in 2010. From 1963–1970 the agricultural-sector employment share declines by about 1 percentage point per year and we extrapolate agricultural-sector employment to the years 1960–1962 assuming the same pattern.
Data on the NIAs are from the Bank of Korea’s website (http://ecos.bok.or.kr). We obtain data on current and constant chained prices for aggregate GDP, private and government consumption, aggregate investment and its components (structures, equipment, and intangibles), and agricultural-sector GPO for the years 1953–1970 and the years 1970–2012 from two separate National Accounts tables. We rescale the 1953–1970 data and splice them with the 1970–2012 data in 1970. For the 1953–1970 period we have current price series for the components of aggregate investment, but not constant price series. We also obtain current and constant chained price series for private consumption of food and alcoholic beverages.
We define the constant price non-farm GDP as a Divisia-index using current and constant price series for aggregate GDP and agricultural-sector GPO. We define non-food consumption in a similar way, using current and constant price series for total private consumption and the consumption of food and alcohol.[16]
Fraumeni (1997) summarizes the information on depreciation rates used by the BEA to construct capital stocks for the US. Depreciation rates differ widely across capital components, from a low of about 2% for structures to a high of about 30% for office equipment. As the composition of aggregate investment changes over time, so will the composition of the capital stock and the implied depreciation rate on the aggregate capital stock. Using BEA data on net-stocks, investment, and depreciation of aggregate structures and producer durable equipment (PDE) for the US from the 1930s to 2000, Gomme and Rupert (2007) confirm that the implied depreciation rates for these aggregate capital components tend to change over time. Most notably, the implied depreciation rate on the PDE aggregate remains relatively stable at 13% until the 1970s, but then increases to 17% by 2000. On the other hand, the depreciation rate on residential structures is relatively stable at 1.5%, whereas the depreciation rate on non-residential structures increases only from 2.5% to 3%.
In Korea the nominal investment share of PDE increases from about 20% of total investment in the 1950s to 50% in the 1980s, and then returns to 40% by 2010. If we assume a 13% depreciation rate for PDE and a 2% depreciation rate for structures, then the nominal investment-share weighted average depreciation rate increases from about 4.5% in the 1950s to 7% in the1980s, with an average value of about 6% for this time period. We calculate the aggregate capital stock using the 6% depreciation rate. Reasonable changes in the assumed depreciation rate have a small impact on the calculated capital stock. For example, for the time period 1960–2011 a change in the depreciation rate of one percentage point will change the terminal capital stock in 2011 by about 5 ppts. This change is small compared with the 560% increase of the capital stock from 1960 to 2011.
Finally, we use the marginal effective tax rates from Hyun, Won, and Yoo (2000) for the period 1960–1998. For want of a better alternative we fix the marginal effective rate at its 1998 value for the years 1999–2011.
Data on nominal investment shares for the Asian Growth Miracles in Figure 1 are from the National Accounts data of the Penn World Table 8.0 (Feenstra, Inklaar, and Timmer 2013).
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©2015 by De Gruyter
Articles in the same Issue
- Frontmatter
- Advances
- International specialization and the return to capital
- How the wage-education profile got more convex: evidence from Mexico
- Contributions
- Africa’s missed agricultural revolution: a quantitative study of the policy options
- Structural transformation and productivity in Latin America
- Public debt and growth in the euro area: evidence from parametric and nonparametric Granger causality
- Transition dynamics in the neoclassical growth model: the case of South Korea
- Household saving in Australia
- An ordered probit analysis of monetary policy inertia
- Fiscal shocks, the real exchange rate and the trade balance: some evidence for emerging economies
- Topics
- Remittances and financial institutions: is there a causal linkage?
- Club convergence in Latin America
Articles in the same Issue
- Frontmatter
- Advances
- International specialization and the return to capital
- How the wage-education profile got more convex: evidence from Mexico
- Contributions
- Africa’s missed agricultural revolution: a quantitative study of the policy options
- Structural transformation and productivity in Latin America
- Public debt and growth in the euro area: evidence from parametric and nonparametric Granger causality
- Transition dynamics in the neoclassical growth model: the case of South Korea
- Household saving in Australia
- An ordered probit analysis of monetary policy inertia
- Fiscal shocks, the real exchange rate and the trade balance: some evidence for emerging economies
- Topics
- Remittances and financial institutions: is there a causal linkage?
- Club convergence in Latin America
