Capital formation and productivity growth in South Korea and Taiwan: realising the catch-up potential in a world diminishing returns

In this paper we reconstruct the non-residential capital stock of South Korea and Taiwan based on long-term series of investment in non-residential buildings and machinery and equipment. Secondly, we looked at the impact of capital input measures, using a stock as a well a flow measure of capital, on total factor productivity growth. Finally, to assess the potential for continued catch-up of the emerging economies towards productivity levels of the more advanced countries, we analyse capital-output ratios and the change in comparative levels of capital intensity and labour productivity. For both countries we find a rapid growth of the capital stock for the total economy and for manufacturing, with growth rates that peaked between the mid-1960s and the mid-1980s. In particular with capital inputs measured in terms of service flows, total factor productivity growth is low up to the mid 1980s. Since then TFP growth slightly improved which is related to the slowdown of labour input growth. Capital-output ratios continued to rise for the total economy. For manufacturing we found a strong rise in capital-output ratios in particular since the 1980s. In terms of comparative levels, there are still large gaps between the two East Asian countries and the USA in terms of capital-labour ratios and labour productivity. This indicates that despite the diminishing returns to capital goods, especially in manufacturing, opportunities for further growth on basis of accumulation are still far from exhausted. This remaining catch-up potential ought to be realised by complementing capital accumulation with productivity growth.