ESTIMATING THE TOTAL FACTOR PRODUCTIVITY OF KOREA

Abstract

There has been a constant debate for decades on to what extent technical progress contributes to the economic growth of an economy. This is thanks to World KLEMS initiative which has been set up to promote and facilitate the analysis of growth and productivity patterns around the world, based on a growth accounting framework. At the heart of the initiative is the gradually building up of new databases on output, inputs and productivity at a detailed industry level, having as its objective to incorporate KLEMS-type data sets into Official Systems of National Accounts. The growth of outputs, inputs, and productivity at the industry level is crucial for understanding the sources of economic growth and the nature of Structural change. Total factor productivity according to Economists, is an important factor in the process of economic growth. The evolution of total factor productivity (TFP) is a key determinant of long-run economic growth of a country. However, just how important it is has been a matter of ongoing controversy. Part of this controversy is about methods and assumptions. Total factor productivity growth is estimated as residual, using index number techniques. A New Economy critique of productivity points to unmeasured gains in product quality, while an environmental critique points to the unmeasured costs of growth. This paper is intended to show what results can be expected from the productivity framework and what cannot. The ultimate objective is to demonstrate the considerable utility of the idea, as a counter-weight to the criticism, often mistaken, to which it has been subjected. Despite its flaws, the residual has provided a simple and internally consistent intellectual framework for organizing data on economic growth, and has provided the theory to guide a considerable body of economic measurement. The focal point of this study is about to what extent technical progress will contribute to the economic growth of Korea. This research is conducted with sample data for1970 to 2012 of Korea KLEMS Growth and Productivity database with all its 72 industries compiled by Korea Productivity Center (KPC). Besides Capital and Labor, Energy, Material and Services are used as separate inputs unlike previous researchers who group energy, material and service inputs under intermediate inputs. This paper aims at quantifying the total factor productivity (TFP) of the Korean economy using Korean KLEMS database to see to what extent technical progress has contributed to output by sector from 1970-2012. In this paper, focus is placed on all the 72 industries as prescribed by EU KLEMS-March 2011 updated database. The 72 industries, after being examined at aggregate level, were then classified into five different subgroups, such as Agriculture, Mining, Manufacturing, Utilities, and Services. TFP was calculated for the aggregate level as a whole consisting of 72 sectors as well as for five different subgroups. The empirical results show that the total factor productivity growth rate for agriculture, utilities and services is insignificant as compared to that of the mining and manufacturing sectors. This is due to the Korean government’s policy to prioritize the manufacturing sector because of its global competitiveness, thus suggesting it has reached high productivity level and its scope for further productivity improvement is limited. Therefore, there is the need to liberalize the services sector which probably may increase the productivity of the manufacturing subsectors which use liberalized services as inputs. This will go a long way in boosting other sectors like the utilities and agricultural sectors. From the results obtained from my findings, some policy recommendations are given that will help the Korean government and its policy makers for future industrial adjustments.

Keywords: Aggregate level, Agriculture, Growth accounting model, Korea KLEMS, Korea Productivity Center (KPC), Mining, Manufacturing, Services, Total Factor Productivity (TFP), Utilities, World KLEMS