Earlier articles have analysed trends in the international growth accounting database, covering the period 1989-2006, published by Jorgenson and Vu (Ross, 2010) (Jorgenson & Vu, 2007b). In their analysis of this data Jorgenson and Vu emphasised that increase in factor inputs, capital and labour, were a much higher percentage contribution to international GDP growth than total factor productivity (TFP) and the major role played by inputs of information technology (IT) capital. The present author, analysing this database, found a clear international pattern that the capital intensity of GDP growth, i.e. the percentage of GDP growth accounted for by capital inputs, was greater in developed than in developing economies. This confirmed other measures showing the same process with economic development. (Ross, 2010)
This trend is of considerable importance:
- Practically, it indicates a pattern that as an economy makes a transition from developing to a developed status it will become more dependent on capital investment for growth.
- Theoretically, it confirms the analysis of classical economics, deriving from Adam Smith, that the contribution of capital to growth increases with economic development.
Since this analysis of their earlier database was carried out, Jorgenson and Vu have published new data covering the period up to 2008. (Jorgenson & Vu, 2010) The present paper analyses this new data. It again clearly confirms that capital intensity of growth is greater in developed than in developing economies. This article focuses on the new database and for a more comprehensive presentation of the issues the earlier paper should be consulted. (Ross, 2010a)
It should be pointed out that while this paper utilises calculations based on data produced by Jorgenson and Vu they do not bear responsibility for the conclusions drawn.
The percentage contribution to GDP growth of capital, labour and TFP, calculated from updated database of Jorgenson and Vu, is set out in Table 1 and illustrated visually in Figure 1.
Jorgenson and Vu divide their data into two groups of developed economies, the G7 and non-G7, and five groups of developing economies – Developing Asia, Sub-Saharan Africa, Latin America, the Middle East and North Africa, and Eastern Europe including the former USSR.1 The pattern that GDP growth is more capital intensive in developed economies than in developing economies, i.e. capital accounts for a greater percentage contribution to GDP growth in developed economies than in developing ones, is clearly confirmed by this data.
- In all periods, the percentage contribution of capital to GDP growth in the G7 developed economies is higher than in any group of developing economies.
- In all periods, the contribution of capital to GDP growth in either the G7 or the non-G7 developed economies is higher than in any group of developing economies.
- In all periods, the contribution of capital to GDP growth is higher in both the G7 and the non-G7 developed economies than in the developing economies of Latin America, Sub-Saharan Africa, Eastern Europe or the Middle East and North Africa.
- In seven out of eight measurements (i.e. two groups of developed economies times four periods), the contribution of capital to GDP growth of both the G7 and the non-G7 developed economies was greater than in any group of developing economies – the only exception being in 1995-2000, when the contribution of capital to GDP growth in the developing Asian economies exceeded that in the non-G7 developed economies although remaining lower than in the G7 economies.
In short, the pattern is clear that developed economies show capital intensive growth compared to developing economies – i.e. the percentage contribution of capital to GDP growth is higher in developed than in developing economies. These trends may be seen visually in Figure 1.
Developing Asian economies
In an earlier paper it was analysed that the Asian developing economies, in terms of their capital-intensity of development, were an ‘intermediate’ group between the developed economies, which had capital-intensive growth, and the majority of developing economies, which had a pattern of labour-intensive growth. (Ross, 2010a) This is confirmed in Jorgenson and Vu’s new database.
In 15 out of 16 possible measurements (four periods times four sets of comparisons) the developing Asian economies had a higher percentage contribution of capital to GDP growth than the four other groups of developing economies – the only exception being Sub-Saharan Africa in 2004-2008. However in seven out of eight possible measurements the developing Asian economies had a lower percentage contribution of capital to GDP growth than both groups of developing economies and in all periods the developing Asian economies had a lower percentage contribution of capital to GDP growth than in the G7 economies.
Non-Asian developing economies
Eastern Europe, undergoing transition from Communism to capitalism, stands apart from all other groups in that its primary source of GDP growth is TFP – for a detailed discussion see (Jorgenson & Vu, 2010). In terms of developing, as opposed to developed, economies the labour intensive character of growth in the non-Asian developing economies is clearly shown in Jorgenson and Vu’s data.
Taking Latin America, Sub-Saharan Africa, and North Africa and the Middle East in 12 possible comparisons (three groups of countries times four periods), labour makes the highest contribution to GDP growth in 10 of these – the exceptions being Sub-Saharan Africa in 2004-2008, when capital made the greatest contribution, and North Africa and the Middle East in 2004-2008 when TFP made the largest contribution.
The pattern of capital-intensive growth in developed economies, of labour-intensive growth in the majority of developing economies, and the Asian developing economies forming an ‘intermediate’ group between the two is therefore clear.
The percentage contributions of labour and TFP to GDP growth by economy grouping are shown in Figure 2 and Figure 3.
The present author has previously presented clear evidence of the trend of the rising contribution of capital investment to GDP growth in long term historical development. This includes:
- The historically clear trend for the percentage of fixed investment in GDP to rise in the most rapidly growing economies of each period of growth (Ross, 2008a) (Ross, 2010).
- The demonstration by Maddison and others that over time the percentage of fixed investment in GDP rose in the main developed economies – the historically constant proportion of fixed investment in GDP of the US being clearly the exception and not the rule. (Maddison, 1992) (Barro & Sala-i-Martin, 2004, p. 15)
While this data was clear in qualitative terms, due to its long term historical framework and coverage of the largest economies, it could be potentially argued that it was not fully comprehensive in scope due to lack of sufficient coverage of developing economies. Jorgenson and Vu’s data however deals with any attempted refutation based on claims of lack of comprehensive coverage – their data includes economies accounting for more than 95% of world GDP including all major developing economies. Jorgenson and Vu’s research is also carried out in the framework of the World Bank’s International Comparison Programme and may be taken as the latest and at present most authoritative database on international economic growth. (World Bank, 2008)
In light of the historical data and Jorgenson and Vu’s comprehensive international coverage the factual evidence is overwhelming. The contribution of capital to growth increases with economic development whether this is considered historically or in terms of contemporary patterns of economic development. This is not only of practical importance for economic development but, as analysed previously, confirms a key postulate of classical economics originally advanced by Adam Smith.
1 For details of the countries in each group see (Jorgenson & Vu, 2010). For brevity “Eastern Europe” in the rest of the article, unless specified otherwise, will be taken to include the former USSR.
Jorgenson, D. W., & Vu, K. M. (2007b). Information technology and the world growth resurgence - updated tables. Retrieved from Dale Jorgenson: http://www.economics.harvard.edu/faculty/jorgenson/recent_work_jorgenson
Jorgenson, D. W., & Vu, K. M. (2010). Potential growth of the world economy. Journal of Policy Modeling (doi:10.1016/j.polmod.2010.07.011).
Maddison, A. (1992). A long run perspective on saving. Scandanavian Journal of Economics , 94 (2), 181-196.
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Ross, J. (2008a, September 17). Why Asia will continue to grow more rapidly than the US and Europe - a historical perspective. Retrieved August 22, 2010, from Key Trends in Globalisationi: http://ablog.typepad.com/keytrendsinglobalisation/2008/09/data-on-long-term-trends-in-investment-and-economic-growth--this-post-deals-with-the-historic-trend-of-investment-and-econo.html
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