The mid- to long-term trends in productivity are essential for making economic forecasts as well as for policy-making on R&D, employment, and other key economic issues. However, answering even very basic questions like where does Korea’s productivity growth rate stand in comparison to developed countries, what are the mid- to long-term trends in productivity, and how much does productivity contribute to economic growth is always a challenge. Adding to the difficulty are the differences in total factor productivity measures used by international institutions like the OECD, the EU KLEMS, and The Conference Board, and the Korea Productivity Center and Korean researchers, as well as the different conclusions drawn on the trends in productivity and their causes. This paper compares and analyzes the results of research by major organizations and explains the reasons for the differences in outcomes. Based on the producer theory, it seeks a more appropriate methodology for measuring total factor productivity and discusses how economy of scale and technical advancement contribute to economic growth.
Prior research on Korea’s total factor productivity assumes perfect competition and constant returns to scale in measuring total factor productivity, thus failing to properly reflect the market reality where various levels of monopolistic power and economy of scale come into play. This paper estimates total factor productivity based on a more realistic assumption that monopoly profit exists. Using the total factor productivity measurement of Hall, it was found that productivity growth in the market sector peaked at 2.2% in the 1980s, and then began to decline, reaching 1.3% in the 2000s. However, given the concomitant fall in the growth rate of added value, the contribution of total factor productivity to economic growth rose from 22% in the 1980s to 31% in the 2000s. The largest contribution to growth was from capital input, which recorded an average growth of 1.8% in the 2000s. However, the contribution from capital input was 58% in the 1980s and fell to 43% in the 2000s. Similarly, labor input growth fell from 2.1% in the 1980s to 1.2% in the 2000s, but its contribution to growth rose from 21% to 29% during that period.
In the manufacturing sector, the growth of total factor productivity in the 2000s was only 0.5%, which was half the level of the 1990s. Its contribution to growth fell from 12% to 8%. The growth of capital input and labor input in both cases fell, with the growth of labor input barely above zero. On the other hand, the total factor productivity of the service sector fell sharply from 0.8% in the 1990s to 0.1% in the 2000s, with the share of labor input rising to 19% in the 2000s.
Technical advancement cannot be directly measured if both markup from monopoly profit and economies of scale are acknowledged. Thus, in this paper, a regression analysis was performed following Basu and Fernald (1997) and Diewert and Fox (2008). We find that, in a market economy, return to scale increased from 0.66 to 1.16 after the 1990s, while technical advancement decreased from 4% to 1%. This suggests that an increase in total factor productivity is attributed more to economies of scale than to technical development. Such change was more pronounced in the service sector, where technical advancement went down from 2% before the 1990s to minus 1% afterwards, while return to scale rose significantly from 0.63 to 1.37. This can be interpreted as an indication of the recent scaling-up of service businesses. In the manufacturing sector, it was shown that nearly all technical progress was internalized and returns to scale increased slightly.
As far as returns to scale have increased, it is no coincidence that there have been rising calls to deal with issues of polarization and to establish economic democracy. Economies of scale are two-sided, however. Diewert and Fox (2008) analyzed total factor productivity in the U.S. and cited the important role of increasing returns to scale, arguing that rising returns to scale are key in driving the growth of the U.S. economy. In Korea, the effects of increasing returns to scale on distribution must also be considered. Economies of scale have notably been rising in service businesses, implying that crossing some threshold of scale by opening more stores or franchises affords a competitive edge. However, increasing economies of scale in services may weaken the footing of traditional markets and small retailers, negatively affecting the income of many self-employed. Considering the declining capacity of the manufacturing sector to create jobs, more viable ways must be found to achieve economies of scale in services while minimizing their negative effects on distribution. For example, more policy efforts must be directed to promote cooperative associations so that the self-employed can achieve adequate economies of scale. Networking among SMEs is advised for conducting R&D and finding new markets.
Jang Insong
Prior research on Korea’s total factor productivity assumes perfect competition and constant returns to scale in measuring total factor productivity, thus failing to properly reflect the market reality where various levels of monopolistic power and economy of scale come into play. This paper estimates total factor productivity based on a more realistic assumption that monopoly profit exists. Using the total factor productivity measurement of Hall, it was found that productivity growth in the market sector peaked at 2.2% in the 1980s, and then began to decline, reaching 1.3% in the 2000s. However, given the concomitant fall in the growth rate of added value, the contribution of total factor productivity to economic growth rose from 22% in the 1980s to 31% in the 2000s. The largest contribution to growth was from capital input, which recorded an average growth of 1.8% in the 2000s. However, the contribution from capital input was 58% in the 1980s and fell to 43% in the 2000s. Similarly, labor input growth fell from 2.1% in the 1980s to 1.2% in the 2000s, but its contribution to growth rose from 21% to 29% during that period.
In the manufacturing sector, the growth of total factor productivity in the 2000s was only 0.5%, which was half the level of the 1990s. Its contribution to growth fell from 12% to 8%. The growth of capital input and labor input in both cases fell, with the growth of labor input barely above zero. On the other hand, the total factor productivity of the service sector fell sharply from 0.8% in the 1990s to 0.1% in the 2000s, with the share of labor input rising to 19% in the 2000s.
Technical advancement cannot be directly measured if both markup from monopoly profit and economies of scale are acknowledged. Thus, in this paper, a regression analysis was performed following Basu and Fernald (1997) and Diewert and Fox (2008). We find that, in a market economy, return to scale increased from 0.66 to 1.16 after the 1990s, while technical advancement decreased from 4% to 1%. This suggests that an increase in total factor productivity is attributed more to economies of scale than to technical development. Such change was more pronounced in the service sector, where technical advancement went down from 2% before the 1990s to minus 1% afterwards, while return to scale rose significantly from 0.63 to 1.37. This can be interpreted as an indication of the recent scaling-up of service businesses. In the manufacturing sector, it was shown that nearly all technical progress was internalized and returns to scale increased slightly.
As far as returns to scale have increased, it is no coincidence that there have been rising calls to deal with issues of polarization and to establish economic democracy. Economies of scale are two-sided, however. Diewert and Fox (2008) analyzed total factor productivity in the U.S. and cited the important role of increasing returns to scale, arguing that rising returns to scale are key in driving the growth of the U.S. economy. In Korea, the effects of increasing returns to scale on distribution must also be considered. Economies of scale have notably been rising in service businesses, implying that crossing some threshold of scale by opening more stores or franchises affords a competitive edge. However, increasing economies of scale in services may weaken the footing of traditional markets and small retailers, negatively affecting the income of many self-employed. Considering the declining capacity of the manufacturing sector to create jobs, more viable ways must be found to achieve economies of scale in services while minimizing their negative effects on distribution. For example, more policy efforts must be directed to promote cooperative associations so that the self-employed can achieve adequate economies of scale. Networking among SMEs is advised for conducting R&D and finding new markets.
Jang Insong