CHAPTER-2

LITERATURE REVIEW

2.1 Introduction
The present study is conducted with a motive of finding determinants of economic
growth in selected Asian countries. Since last few decades, a plenty of research has
been conducted to explore the determinants of economic growth. A number of
theoretical as well as empirical studies have made an attempt to find the factors that
can explain the economic growth of a nation. The present study is focused on the
economic growth of Asian region as economies from this region have experienced an
extraordinary economic growth. Therefore, to meet this objective, it is essential to
review these theoretical and empirical studies and also to find the research gap.
So, the present study reviews available literature on economic growth, various
theories developed in the area of growth, and empirical studies that have been
conducted to validate these theories of growth with the help of time-series data. This
study focuses on the Asian region that comprises of the countries with very different
levels of economic growth i.e. on both extremes – high income countries and also the
low income countries. It reveals that there is a wide disparity between the growth
levels of the Asian countries.
2.2 Concept of Economic Growth
Economic growth - its sources, processes, and effects is the main area of concern
for economists since the inception of systematic economic analysis i.e. from the times
of classical school of economic thought (Kurz & Salvadori, 2003). Economic growth is
a generally accepted goal of national policy almost in every nation (Treasury, 1964)
because it is the precondition for welfare of average citizens of a nation (Rodrik,
2014).
In the literature of economic development, the term ‘Economic Growth’ is usually
understood as a process in which an economy’s real per capita income, i.e., real
gross domestic product per capita increases over a long period of time. It is the
money value of all finished goods and services produced within a country’s periphery
in a specified period of time divided by total population (Akbar et al., 2011). In a
narrower sense, it is an increase in national income per capita and also involves the
analysis of this process in quantitative terms with a focus on functional relation
between endogenous variables. In a wider sense, it is an increase in GDP, GNI,
National Income and national wealth (Haller, 2012).
There are two strands followed in literature that explain ‘proximate causes’ of
growth and ‘fundamental origins’ of growth. The first line of work includes physical
capital, human capital, and innovation as proximate causes of growth while the
second strand includes institutions and geography as fundamental origins of growth
(Seshadri & Roys, 2014).
2.3 Theoretical Evidence of Economic Growth
The theory of economic growth, which makes an attempt to find the determinants
of economic growth, has evolved over the period of time from very simplest and
schematic to the one which uses sophisticated economic modelling techniques (Ana,
2010).
The development of any doctrine or philosophy must be viewed with reference to
the circumstances and the conditions of that time under the influence of which it was
developed. In the words of Lord Keynes: No writer can altogether free himself from
the characteristic influences of his age and country; nor it is desirable to do so. It
follows that the theories of the past cannot be properly understood, or their validity
fairly estimated, unless they are taken in connection with the actual phenomena that
were at the time attracting attention and helping to mould and colour men’s views”
(Hajela, 2014).
2.3.1 Feudalism – In the old medieval order, including feudal-era, there was
prevalence of exchange economy i.e., the landlord sub-divide land into smaller
sections and offers a unit of land to a lesser noble man in exchange of military
services, these noble men further sub-divide the land and give it to more lesser noble
man who work on land as labourers. Thus, the medieval community was divided into
three groups, namely: bellatores (the noblemen who fought), labourers (the
agricultural labourers who grew food) and oratores (the clergy man who prayed and
attended to spiritual matters).

18
 But, these three estates found unworkable as work was considered as punishment
at that time and only labourers do work. Towards the end of 15th century, rational
changes took place in the economic set-up of the society. With the advent and
extended use of money, work was no more considered as punishment rather it was
taken as virtue – a source of wealth. Agriculture was replaced by manufacturing
economy (Peet et al., 2009). The sphere of exchange widened and domestic trade as
well as foreign trade developed speedily. These new beliefs and attitudes were
developed by the artisans, craftsmen, small masters and journeymen of early
capitalism. These people were now aware of the value of time they devote to work
(Hajela, 2014).
2.3.2 Mercantilism – During the period of 15th to 18th century, a group of economists
of Europe emerged as mercantilists. According to them economic growth of a nation
stems from accumulation of wealth in the form of precious metals like gold and silver
which can be earned through building up export surpluses from overseas trade.
Because Mercantilists held the view that total world resources are limited and the
power and strength of one nation can be increased only at the cost of other nation’s
wealth by taking it away through foreign trade (Blaug, 1991).
Therefore, commerce and foreign trade were considered as the most productive
profession and agriculture as the least productive because the latter does not
contribute directly to the power and prosperity of nation. The manufacturing economy
dominated agriculture as a more productive sector. The use of money was also
widened.
Favourable balance of trade was another doctrine of mercantilism that led to many
ideas such as to give preference to the production of commodities with high value and
to restrict exports of raw materials. It also included minimization of imports of luxuries.
Mercantilists also recognized the importance of trade of invisible items like freight
income, insurance, diplomatic and military expenditures.
Mercantilists also favoured large and rapidly increasing population for cheap
availability of labour that would keep production costs low and would make nation

19
competitive in the world market. They put importance only to land and labour as
factors of production (Peet et al., 2009).
But in the beginning of 18th century, the decay of mercantilism was initiated as
many writers opposed the policies of mercantilism. Mercantilists put too much stress
on the role of merchants and business class. They considered the commerce and
foreign trade as the only source of prosperity of a nation. They were also erroneous
on the notion that one nation can achieve success only at the cost of other nations.
However, a few number of writers started to question the policies of mercantilists but
it was Francois Quesney who laid the milestone of Physiocratic system and
expressed that it is not commerce and trade rather it is agriculture which is really a
productive sector (Hajela, 2009).
2.3.3 Physiocrats – In the second half of the 18th century, Physiocrats, another
group of economists from France, emphasized on productive work, especially in
agriculture, as an important driver of national wealth or of economic growth (Muller,
1978). François Quesnay, an eminent leader of Physiocrats of 18 th Century, opined
that it is agriculture which is productive enough to generate an economic surplus, and
therefore it is also capable of increasing national wealth (Blaug, 1962; Reynolds,
2000).
Physiocrats believed in the principle of laiseez-faire and they also assigned barest
minimum functions to be performed by State and abolished the useless laws. They
wanted State to be a law protector and not a law maker. In the words of Quesnay,
“the sovereign authority should be one, and supreme above all individual or private
enterprise. The object of sovereignty is to secure obedience, to defend every just
right, on the one hand, and to secure personal security on the other.” Thus, rightly it is
pointed out by Beer that, “the glory of the Physiocrats rests on their social ethics, on
the restoration of human solidarity, on the negation of economic nationalism, on the
doctrine of equal exchanges and natural liberty, on the combination of moral
discipline with economic freedom. It is these contributions which assured to them a
prominent place in the history of economic thought” (Hajela, 2009).

20
 Despite all these, Physiocrats’ versions also had several weaknesses. Galiani
opposed their idea of natural order and their attempt to construct economic system.
The French economist Condillac criticized them for considering manufacturers as
sterile. In response to this, Condillac proposed the theory of value when Physiocrats
were giving more emphasis only to the theory of production and distribution and
ignored the theory of exchange. They were also wrong at an assumption that
manufacturing could never be able to produce surplus over cost while it could be
done only by agriculture. And, it is critical to note that in the midst of industrial
revolution, they tenaciously believed that manufacturers are sterile (Ekelund et al.,
2013).
2.3.4 The Classical School of Economics – The classical school of economics
opined that investment in productive activities is the main driving force of economic
growth and they also believed that production involves labour, capital, and natural
resources (Kurz and Salvadori, 2003). This school belongs to larger intellectual
system of political economy, of mainly British economic thought, that ranges from the
period of 1776 with the publication of Adam Smith’s book ‘An Inquiry into the Nature
and Causes of the Wealth of Nations’ to the period of 1848 with the publication of
John Stuart Mill’s ‘Principles of Political Economy’. It is generally called that the
classical school lasts for a period of 100 years. The classical economists articulated
the seeds of Mercantilists and Physiocrats into a more or less unified system called
‘classical economics’ (Landreth et al., 2002).
The classical economists link and distinguish their work from previous and
subsequent works through a number of characteristics. They differed from
mercantilists with their doctrine of natural working of economic forces without any
constraints and restrictions. But both had same views in respect of increasing the
wealth of nations. The classical economists had two prime visions; first, harmonious
working of economic process, and secondly, they were concerned with economic
growth and they didn’t only focus on economic forces rather also emphasised the
importance of the cultural, political, sociological, and historical factors that determine
growth (Landreth et al., 2002).

21
 Adam Smith advocated for free trade as the main driving force of a free capitalistic
economy under the laissez-faire regime (Aspromourgos, 1999; Hajela, 2014; Peet et
al., 2009; Reynolds, 2014). Smith viewed growth process strictly as endogenous
because he emphasised on the role of increased labour productivity by raising their
skill levels, by improving dexterity of workers and through innovation for increasing
surplus product (Kurz, 2010).
According to Ricardo, an economy is composed of three working groups viz.
landlords, capitalists and labourers; but in his opinion it is only capitalists who initiate
the process of growth (Golub et al., 2000). He also criticised the Physiocrats by
stating that it is not only agriculture rather every sector of an economy could be
profitable and it is a market that allocates investment accordingly (Lanza, 2012).
T. R. Malthus, a leading classical economist, explained the growth process from
demographic point of view and stated that population grows in a geometric
progression with means of subsistence increases in arithmetic progression (Malthus,
1951).
J. A. Schumpeter, another notable classical economist argued that economic
growth is an outcome of disturbances created by an innovation, made by an
entrepreneur, in a continuous circular flow of income. Economic Growth in his own
words is “spontaneous and discontinuous change in channels of flow, disturbance of
equilibrium which forever alters and displaces the equilibrium state previously
existing” (Aghion et al., 2013).
The growth theorists of 1950s and 1960s considered the process of growth as a
sequence of historical stages. According to W. W. Rostow, every country has to go
through the five stages during its growth process, i.e., traditional society,
preconditions for take-off, take-off, drive to maturity and age of high mass
consumption (Rostow, 1959).
2.3.5 The Neoclassical School of Economics – It was during and after 1870s, the
focus of the classical school of economics had shifted from capitalist economy as a
whole towards decision making processes of individuals, and also shifted from
macroeconomic issues like growth, inflation, unemployment towards microeconomic

22
issues like individual preferences, marginal utilities, production functions, marginal
costs and general equilibrium. This major shift gave a new name to classical
economics i.e. neoclassical economics with the proponents like W. S. Jevons, F. Y.
Edgeworth, L. Walras, C. Menger, A. Marshall (Wolf & Resnick, 2012).

2.3.6 The Keynesian school of Economics – The Great Depression of 1930s

proved neoclassical economic thought and their belief in humanist tradition and in
capitalism as a failure. Both classical and neo-classical economic thoughts had very
few explanations for depression and had not prepared any solutions for such
depression. Therefore, J. M. Keynes at that time suggested a need for government
intervention in the form of fiscal policy to raise aggregate demand and, to tackle the
problem of unemployment. The advent of Keynes theory is another shift in economic
philosophy from humanism to structuralism (Wolf & Resnick, 2012).
Keynesian theory opposed the idea of free market that would automatically
provide full employment and asserted that free markets have no self-balancing
mechanism that would lead to unemployment (Jahan et al., 2014). Rather, his theory
emphasised that optimal economic performance can be achieved by stimulating
aggregate demand with the changes in government expenditure and tax policy and by
doing so economy can be held back from depression (Keynes, 1936). Therefore
Keynes justified government intervention that should be aimed at full employment and
price stability (Jahan et al., 2014).
2.3.7 Neo-classical or Exogenous growth models – These growth models are
crux of the contributions made in the neoclassical economics framework. It focuses
on capital accumulation, population growth and technical progress. The neo-classical
models envisage that in long-run an economy will move towards a steady state where
growth rate of the economy depends on technological progress. In neo-classical
growth models the long-run growth stems from technical progress. The Solow-Swan
model of 1950s is the most important contribution in neo-classical growth models
(Gupta, 2014).

23
 Ramsey growth model (1928) is also a neo-classical model concerned to
determine the optimal rate of savings and also to reveal how myopic agents would not
achieve that optimum level of savings.
Harrod-Domar (1939, 1946) proposed a steady state long-run model in which rate
of capital accumulation is a critical determinant of economic growth where capital
accumulation and growth of income go side by side (Sato, 1964). Harrod-Domar
model explains the relationship between growth and unemployment in advanced
capitalist economies while in developing countries it is used for looking the
relationship between growth and capital requirements. Three forms of growth are
proposed in this model i.e. warranted rate of growth, natural rate of growth and actual
rate of growth. Harrod-Domar growth model concludes that in the long-run an
economic system achieves balanced knife-edge equilibrium.
Robert M. Solow (1956) extended the Harrod-Domar model of long-run growth
under the neo-classical framework by including technological progress and population
growth to capital accumulation (Solow, 1956). Solow model explains that how with
economic policy rate of economic growth can be raised by inducing people to save
more. The model also predicts that this growth is not indefinite. In the long-run, it will
slip back to the rate of technological progress that is assumed exogenous in
neoclassical growth theory. Neo-classical economists claimed that increase in capital-
labour ratio contributes to economic growth based on the assumptions of the
exogenous technological change, constant returns to scale, substitutability between
capital and labour, and diminishing marginal productivity of capital as conditions of
growth (Aghion & Howitt, 2010).
Ramsey-Cass-Koopmans model (1965) – It was the first model that modified the
Solow model by using mathematical version of Ramsey’s (1928) paper with
endogenous rate of savings. The model maintained the same structure of Solow-
Swan model and characterized the optimal rate of capital accumulation to maximize
some social welfare criterion.
In the mid-1980s, it became clear that neo-classical models failed to explore the
determinants of long-run economic growth. These models considered the long-run

24
growth rate output as exogenous. In the absence of technical change, growth rate of
output depends on the growth rate of labour that further depends on the growth of
population which is exogenous to the economic system. The rise in saving will not
produce any growth of output because it would be just equal to the growth of labour. It
is only technical change that can raise growth rate of output but that is also
exogenous (Gupta, 2014).
2.3.8 Endogenous growth models – As a response to the fallacies of neo-classical
models, endogenous growth models or new growth theories developed in 1980s
which considered growth process as endogenous to system. In neo-classical models,
the question “where does technological progress come from?” remained unexplained.
Endogenous growth models explain it as an endogenous process that comes as a
process of learning by doing, within a firm, within an industry, and within a
metropolitan area as well (Barro & Sala-i-Martin, 2004).
AK growth model – This model is the first version of endogenous growth models
which predicts that log run growth of an economy is determined by thrift and by
policies and institution that affect the efficiency of resource allocation of a nation
(Gupta, 2014). The foremost property of endogenous growth models is the absence
of diminishing returns to capital and AK model is simplest from production function
with the absence of diminishing returns to capital (Barro & Sala-i-Martin, 2004).
Paul Romer (1986) – Romer in his work divided the world into objects and ideas
where objects are scarce and are subject to scarcity while ideas do not. The objects
alone cannot lead to economic growth. He placed the central role to ideas, Research
and Development (R&D) and innovation in determining the economic growth because
ideas are limit less and are not subject to law of diminishing returns (Dinopoulos et
al., 1996). It is the R&D i.e. searches of new ideas by researchers in advanced
nations that lead to technological progress and hence lead to economic growth.
Robert Lucas (1988) – This model states the endogenity of economic growth, and
considered human capital as the main determinant of economic growth as it
increases the productivity of both labour and physical capital (Bethmann, 2007).
Lucas in his model assumes that a person divide his time into current production and

25
into acquisition of skills that would increase his productivity (Aghion & Howitt, 2010),
and thus, contribute to economic growth.
Mankiw-Romer-Weil (1992) – This model extended the Solow model using human
capital besides the physical capital and introduced ordinary labour as the third factor
of production. This model predicts a positive relationship between per capita GDP
and physical and human capital intensities. Thus, endogenous growth models
highlight the role of human capital (Edwards, 2004).
2.3.9 Neo-Schumpeterian economics – It is also known as innovation economics,
emerged in 1990s which state that in the present knowledge based scenario only
capital is not sufficient for economic growth and thus, prime emphasis has been
shifted to the innovation and knowledge as the determinants of economic growth
(Hanusch et al., 2007).This innovation can be seen in the form of horizontal
innovation and vertical innovation (Barro et al., 2004).
The neo-classical models assumed population as fixed and exogenous to the
system, but various growth models concerning migration (along with other factors like
choices about fertility) endogenize the population, and considered labour force
participation as a vital driver of economic growth (Beine et al., 2001). Besides these
explicit factors, there are many other implicit factors whose contribution to economic
growth cannot be measured directly. Thus, in the growth accounting methodology
these are termed as the ‘Solow Residual’ (Barro, 1999).
2.4. Empirical Evidence of Economic Growth
The earliest attempts to quantify the theory of economic growth were done by
practising the exercise of growth accounting which reveals that how much growth can
be explained by increases in various inputs. The growth accounting asserts that the
growth of an economy’s GDP is a result of growth in labour input, growth in capital
input, and the growth in capital input which is popularly known as Solow residual
which measures the increase in output that cannot be explained by any other input
growth (Crafts, 2009). The growth accounting can be applied to individual countries
with the available data on their inputs and output (Hulten, 1978).

26
 Although, growth accounting exercise can be performed on the basis of individual
country’s data to test the convergence property of Solow model, a cross-country data
is required that can be compared. Therefore, the Late Irving Kravis, Alan Heston,
Robert Summers and other economists developed a database in several decades
which measures the various macroeconomic aggregates on a comparable basis of
purchasing power parity. Their database is known as Penn World Tables that
appeared in 1990s which gave stimulus to the long wave of empirical research
(Ponomareva & Katayama, 2010).
On the basis of Penn World Tables, economists have tested the validity of Solow
model particularly the convergence hypothesis. And, with the availability of cross
section data economists are able to investigate the reasons for the growth differential
among the countries. Several economists have tried to answer the question that why
some countries grow faster than others and why other countries lag behind.
It is the emergence of endogenous growth models or the new growth theories that
along with development of Penn World Tables geared up the empirical analysis of
economic theory by using single-equation macroeconomic models for cross section of
countries. The new growth theories have employed the extended version of neo-
classical model and explored the various determinants of growth and indicate the
significance of institutions, knowledge accumulation, catch up and convergence for
explaining growth differentials (Florax et al., 2002).

The research on economic growth can be classified in three categories: world

growth, country growth, and dispersion in income levels. The first strand of empirical
growth explains the continuous growth in income per capita in the world economy
whereas the theory of country growth analyses the variation observed in country’s
growth. And, the dispersion in income examines the question why some countries are
richer than others (Klenow & Rodriguez-Clare, 1997).

2.4.1. Determinants of Economic Growth

The development of Mankiw-Romer-Weil model extended the neo-classical model
with the inclusion of human capital as a one factor of production (Mankiw et al.,
1992). R. J. Barro also conducted a study entitled ‘Determinants of Economic Growth
27
– A Cross-Country Empirical Study’ with a large sample of countries and has listed a
number of variables that have significant impact on economic growth (Barro, 1998).
Likewise a series of empirical work on determinants of economic growth has been
done and came out with a number of variables that can explain the growth of nations.
These are briefly stated below:
A. Human Capital and Economic Growth
In the formative years of empirical work human capital, measured by educational
attainment, was considered as an important determinant of economic growth and this
linkage is validated by the empirical evidence of a broad group of countries (Barro,
1992). It is the acquired capital through formal and informal education, training, and
expertise (Mincer, 1984). Human capital has a positive impact on economic growth as
it raises the total factor productivity of a nation (Benhabib & Spiegel, 1994). Human
capital also effects growth in interplay with fertility rate. it has been observed that the
nations with abundant human capital would prefer small families as the rates of return
on human capital investments are higher than the return on children whereas the
nations with scarce human capital would prefer large families as the rates of return on
children are higher relative to the rate of return on investments in human capital
(Becker et al., 1990). Education and health are used as proxies of human capital
(Barro, 2002; Knowles & Owen, 1995).
B. Financial Development and Economic Growth
Several firm-level studies, industry-level studies and country level studies also
admitted a strong positive link between the functioning of financial system and long-
run economic growth (Shaw, 1973; Levine, 1997; Hassan et al., 2011; Durusu-Ciftci
et al., 2017). De Gregorio (1995) has used the bank credit to private sector and to
GDP as a proxy for financial development that is found to be positively correlated with
for a large sample of cross-countries. But this effect is found to be negative for Latin
American countries.
C. Trade Openness and Economic Growth
Trade openness has been considered as another significant variable of growth
indicating that as the economy is more open it will grow faster (Dao, 2014; Harrison,

28
1996). It has been observed that trade openness has not direct and straightforward
impact on growth and in contrast with traditional findings; it has been observed that
trade barriers are positively and significantly related with growth in case of developing
countries (Yanikkaya, 2003).
D. Foreign Investment and Economic Growth
Alfaro et al., (2004) argued that FDI has a great contribution in the economic
growth but at the same time it is found from this study that the positive effects of FDI
on economic growth can only be realized in the presence of developed financial
markets (Azman-Saini, 2010). It is also found that FDI would be fruitful if the nation
has some absorptive capacity as FDI is an important vehicle for transfer of technology
(Boresztein et al., 1998).
E. Fiscal Policy and Economic Growth
Besides these variables, literature on determinants of growth has also supported
several other variables that stimulates economic growth such as foreign aid (Moolio,
2016; Durbarry et al., 1998); remittances (Pradhan et al., 2008; Incaltarau & Maha,
2011; Ratha, 2013); economic freedom (De Haan & Sturm, 2000; De Haan &
Siermann, 1998; Heckelman, 2000; Gwartney et al., 1999; Carlsson & Lundström,
2002); government spending (Barro, 1990; Devarajan et al., 1996; Cashin, 1995);
institutions (North, 1989; Knack & Keefer, 1995; Eichengreen, 1945; Rodrik, 2008);
and infrastructure (Esfahani & Ram re , 2003; Munnell, 1992).
F. Inflation and Economic Growth
The relationship between inflation and economic growth is debatable in both theory
and empirical studies. The structuralists believe that inflation is essential for economic
growth while the monetarists considered inflation as detrimental to economic growth
(Salian & Gopakumar, 2008). On the other hand, empirical studies concludes that
inflation is healthy for economic growth up to some threshold level, that varies with
the nation, but if increases above this level then it is detrimental for economic growth
(Vinayagathasan, 2013; Ayd n et al., 2016; Bittencourt, 2012). In other words higher
level of inflation is harmful for economic growth as compare to lower levels of inflation
(Balcilar et al., 2017).

29
 G. Energy use and Economic Growth
The association is found to be positive between both renewable and non-renewable
energy consumption and economic growth in case of 29 OECD countries (Gozgor et
al., 2018). A study by Shahbaz et al. (2018) suggests that at lower levels of economic
growth, energy as an input is less important. And with the rise in economic growth,
demand for energy declines as a nation becomes more energy efficient. A
unidirectional causality is found from energy consumption to economic growth in case
of United States (Kourtzidis et al., 2018).
H. Population and Economic Growth
The relationship between population and economic growth is not straightforward
rather it is controversial. Population growth provides labour force, large size of
market, and competition that leads to technological advancement thereby contributes
positively to economic growth. But, at the same time population growth creates the
problems like food shortage, constraints on savings, foreign exchange, and human
resources thereby it is detrimental for economic growth (Tsen & Furuoka, 2005). In
high income countries, low population growth can create social and economic
problems while population growth can lower the development of low-income countries
(Wesley & Peterson, 2017).
I. Agricultural Productivity and Economic Growth
In developing economies, agriculture sector assumes to employ a large share of the
population and approximately contributes 25 percent value added in GDP. Therefore,
it is obvious that productivity of agriculture sector greatly affects economic growth
(Gollin, 2010). It is clear from Nigerian economy where agriculture productivity
positively and strongly affects economic growth (Amire, 2016). In case of Turkey, it is
the low productivity of agriculture sector which is the main reason for divergence of
income per capita between Turkey and its peer countries (İmrohoroğlu et al., 2014).
2.4.2. Single-country Growth evidence
One of the patterns in the existing literature of empirical work on determinants of
economic growth is in terms of single country analysis. There are a number of studies
that explored the possible variables that can affect the economic growth of a

30
particular nation. The work in this direction has explored several other drivers of
growth as these variables are not same across the countries and also vary with time.
Adu (2013) and Darko (2015) found robust evidence for labour force, investment
rate, financial development, terms of trade, and trade openness as a key drivers of
economic growth in Ghana. In Nigeria, labour, life expectancy, degree of openness
and economic freedom affect nation’s growth on aggregate composition index, on the
other hand, at disaggregate level, size of government negatively and freedom to trade
positively affects the growth (Ajide, 2014). A very recent study revealed that the long-
run economic growth of Nigeria is significantly influenced by the level of investment
while political stability and political freedom has negative impact on the growth of a
nation (Mustafa, 2017).
In Brunei Darussalam, it is the growth of exports and the size of government that
has influenced its long-run growth (Anaman, 2004). In Vietnam, FDI has played an
important role in nation’s growth but it is also observed that the effects of FDI on
growth would be even more larger if the resources are to be invested in education
and training, in development of financial markets, and by reducing the technology gap
between local and foreign firms (Anwar & Nguyen, 2010). In case of Mauritius, it is
financial development, domestic investment, labour, and prices that contributed to
nation’s growth (Damoense-Azevedo, 2013) whereas in Turkey it is exports that
played a key role in its growth although FDI also have a positive impact but it is
significant (Gocer, 2013). In Malaysia, government development expenditure has
significantly contributed to its growth (Hussin et al., 2013). Pakistan’s long-run growth
is positively correlated with development expenditure, physical capital, and trade
openness (Jamil et al., 2013). In Somalia, gross capital formation and FDI are found
to be significantly effecting economic growth (Ali et al., 2017).
An insight into the literature based on single country analysis reveals the picture
that in case of developing countries like Pakistan, Nigeria, Ghana, the key driver of
growth is trade openness that is common among these nations whereas in countries
like Vietnam, Turkey, Mauritius which are better off in terms of growth than the
developing countries it is foreign direct investment that contributed to their growth

31
process. Therefore, a lesson can be learned from this insight by developing countries
that they should promote more of foreign direct investment. The foreign direct
investment is more beneficial if it is invested on education, training, and financial
development.
2.4.3. Multi-country growth evidence
Another pattern in the empirical literature of growth is the exploration of drivers of
for a group of countries. These groups of countries can be like African countries,
European countries, Asian countries, South Asian countries, South East Asian
countries, East Asian countries, CEE countries etc.
In CEEC-4 countries i.e. Hungary, Poland, Slovakia, and Czech Republic, the
sources of growth in output are growth in capital and growth in TFP during 1995-
2010. And convergence among countries becomes possible with transfer of
technology (Baran, 2013). The growth of Asian countries got effected from financial
crises but over the period of 1980-2012, the private and public investment drives
strong growth in the region (Ghazanchyan et al., 2015).

In South Asian countries, it is the institutional measures i.e. voice and

accountability and government effectiveness are significant predictors of growth
(Bhattacharjee & Haldar, 2015) whereas the developing Asia has grown rapidly due
to the robust growth in capital accumulation and there is scope for policy reforms in
education, property rights, and R&D to raise the GDP growth of the region (Lee &
Hong, 2012). The miraculous growth of East Asia is the outcome of their substantial
potential for catching up, structural characteristics, demographic changes, and also
their economic policies and strategies for growth (Steven et al., 2001).
In South-East Asia it is transitional convergence that led to the growth of a region
(Brueckner & Kraipornsak, 2016). Another study revealed that Asia has experienced
a consumption led growth where high savings, high national competitiveness in the
world and a large defence spending also played its role in region’s growth (Kim,
2017). The analysis of Western Balkans reveal that FDI, gross savings, and domestic
credit to private sector has a positive impact on growth while corruption,

32
unemployment, general government consumption expenditure has negative impact
on per capita growth (Fetai et al., 2017).
In case of South-East European countries, the factors that have significant impact
on growth are ratio of current account to GDP, exchange rate, population, general
government balance, general government consumption expenditure, inflation,
privatization, and private liberalization (Trpkova & Tashevska, 2011).
2.5. Economic Growth in Asia
Asia is a largest and most populous continent on the globe with dynamic spheres
of economic, social, and scientific activities. The continent is divided into four sub-
regions namely – Central Asia, East Asia, South Asia, and South-East Asia. Asia
which was under the colonial controls before World War II has transformed itself into
a dynamic and fastest growing region in the world (Moon & Lee, 2013).
The question that winks up in our mind is why economic growth of Asia is so
important to discuss. The answer lies in significant performance of the Asian
countries since last few decades of 1960s and 1980s and also lies in its role in pulling
the global economy out of recession (Lee & Hong, 2012).

Asia is a fastest growing region in the world partly due to the adaption of outward
and export oriented policies (Goh et al., 2017). Asia’s growth is led by Japan in
1960s, followed by by the Asian new industrialized countries in 1970s, and in the
recent years by ASEAN and China (Dunn, 1997). In recent years, the Asian countries
have grown faster than the other developed countries and the Latin American
countries (Choi & Beladi, 2006).
The demographic dividend available with Asian countries is also one of the
contributing factors to the convergence of these countries towards developed
countries like U.S. in terms of standards of living or GDP per capita (Ha & Lee, 2016).
It is the life expectancy, age structure, and population density that contributed to
Asia’s growth and the higher income created virtuous circle by further reinforcing low
fertility (Bloom & Finlay, 2009). The structural transformation has also played a
significant role in the growth Asian economies. The lower income countries get
benefitted by resource reallocation from agriculture towards other sectors of the

33
economy while in the advanced economies; productivity growth has increased with
the shift of labour to service sectors (Vu, 2017).
The Asian countries have attained the high levels of growth in a short span of time
relative to other developed and industrialised countries. It took Japan 35 years and for
South Korea only 11 years to double its per capita GDP whereas Britain took 58
years for the same (Choi & Beladi, 2006). Asia is also the first region to weather the
global economic crisis of 2008-09 with its sound fiscal and monetary policies and due
to the resilient demand in the larger economies of the region (Lee & Hong, 2012).
However, the Asian economic development appears with the disparity in human
development levels and economic growth (Mustafa et al., 2017).
The developing East Asia includes China, Hong Kong, Indonesia, South Korea,
Malaysia, Philippines, Singapore, Taiwan, and Thailand (Lau & Park, 2003). The four
East Asian tigers are Hong Kong, Singapore, South Korea and Taiwan (Page, 1994).
Japan which is also a member of G-5 developed country also falls under East Asia
region (Lau & Park, 2003).
The East Asian economies have experienced the impressive economic
performance during the period of 1960s and 1990s (Collins & Bosworth, 1996). Since
1960s, the East Asian countries have grown at 8 percent per annum (Lau & Park,
2003). The growth of per capita GDP of these countries was averaged over 4 percent
while that it was 2.6 percent among the developed countries (Collins & Bosworth,
1996). During this period, these countries also witnessed the increase in average
annual growth of inputs such as high rate of investment, domestic savings foreign
capital inflow relative to G-5 countries, consequently their rates of growth of real
output were also higher than G-5 developed countries (Dunn, 1997). Due to this
sustained economic performance, some economists refer it as “East Asian Miracle”
(Lau & Park, 2003). There is limited literature available on the discussion concerning
sources of miraculous growth of East Asian economies and exposed that it is
openness to trade, imports of capital goods, direct foreign investment, financial
development, technological change and macroeconomic stability that contributed to

34
the growth of these countries (Kim & Lau, 1994; Young, 1994, 1995; Krugman, 1994;
Quibria, 2002; Sarel, 1996; Elson, 2006; Han et al., 2002).
South Asia region includes a set of eight developing countries i.e. Afghanistan,
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. However,
unlike East Asian countries, the investment rates of these countries are not
impressive but the outputs of India, Pakistan, Bangladesh, and Sri Lanka have grown
more rapidly since 1980s than any other region except East Asia (Collins, 2007).
South Asia’s export orientation, inflow of foreign direct investment, infrastructure, and
skill level of workers and ease of doing business are less than East Asia (Devarajan &
Nabi, 2006). In spite of this, South Asia has achieved remarkable economic growth
and significant reduction in poverty (Nabi et al., 2010). The debt rankings by World
Bank of South Asian countries, India and Pakistan have been improved (Siddiqui &
Malik, 2001). The manufacturing sector is underperforming in South Asia relative to
East Asia and Southeast Asia. There is a need to create millions of jobs in the
manufacturing sector (De & Iyengar, 2014).
The South-East Asian countries is a set of countries with different level of
economic growth as on the one side there is Singapore – the third richest country and
on the other side there are Burma and Cambodia which are among the 35 low income
countries according to World Bank’s classification of income. The region has diverted
their path of growth from inward looking dominated by agricultural production towards
the outward looking, industrialized, market-oriented economies, open to trade and
investment (Lunn et al., 2011). A large part of growth in this region has been
generated from the expansion of labour and their movement from agriculture to
industry (Woetzel et al., 2014). Foreign direct investment is a main leading contributor
to the growth of this region as many countries have welcomed the inward FDI to
promote exports (Thomsen, 1999; Samad, 2009).
The most important observation is the rising income inequality across Asian
nations (Jain-Chandra et al., 2016; Balisacan et al., 2006; IMF, 2016). Until 1990,
Asia grew strongly with an equitable distribution of income which became possible
with the rapid growth of Hong Kong, Singapore, South Korea and Taiwan

35
accompanied by an equitable distribution of income (well known as Growth Miracle).
But this equitable society of Asia did not sustain for a long time because in early
1990s, Asia witnessed a rising level of income inequality although it maintained the
growth rate of 6 per cent a year till 2015 (ADB, 2016; Jain-Chandra et al., 2016). The
level of Gini coefficient is higher for Asia relative to the average of rest of the world
(Jain-Chandra et al., 2016). This inequality comes into picture with the presence of
countries with two different extremes in terms of growth performance, i.e., on the one
extreme, there are countries like Japan, South Korea, and Taiwan which maintained
the decade long high economic growth with equitable level of income while on the
other extreme, there are countries like Bangladesh, and Pakistan which experienced
low growth with high inequality. The inequality in Asia is not the homogeneous one
and Ku nets’s hypothesis of inverted-U relationship between growth and inequality
does not hold good for Asia (Balisacan et al., 2006).
Therefore, there are several studies focused on the convergence possibility.
Convergence is said to occur when poor countries tend to grow faster than rich
countries in per capita terms. In other words, economies tend to grow faster in per
capita terms when they are below the steady state position (Barro et al., 1992; Barro
et al., 1995; Radelet et al., 1997; Michelis et al., 2004; Mathur, 2005).
In the literature on convergence, some initial conditions are specified and
economists opine that by following these conditions poor countries would converge
towards steady state level of income (Radelet et al., 1997; Rodrik, 2011). The World
Bank in its report analysed the economic performance and public policy of 8 high
performing East Asian economies for the period 1965 to 1990 which claims that
sustained growth in these economies is the result of macroeconomic stability, human
capital formation, and openness to international trade, private investment and
competition (Michelis et al., 2004).
However, these conditions for convergence may vary from country to country. The
convergence condition of one region may not affect that of another region. In the case
of developing countries, conventional macroeconomic policies, openness policies,
and the active policies that promote economic diversification and foster structural

36
change from low productive activities to high productive activities, play a significant
role in their convergence process.
2.6. Economic Growth in Selected Asian Nations
The present study includes the countries from all income categories classified by
World Bank i.e. High income countries, upper-middle income countries, lower-middle
income countries, and low income countries. Among these countries, there are two
high income countries i.e. Japan and South Korea; five upper-middle income
countries i.e. China, Iran, Malaysia, Thailand, and Turkey; four lower-middle income
countries i.e. India, Indonesia, Pakistan, and Philippines; one low income country is
Nepal. It is very important to know the status of growth, determinants of growth, and
the work done in this direction in the context of these countries through the review of
existing literature.
According to Goto (as cited in Zang & Baimbridge, 2012) Japan was the first
country to achieve the miraculous economic growth in the post World War II era.
Japan, defined as growth miracle, experiences high rates of per capita income growth
for a long and sustained period of time that enables it to transmute from a poor
economy into a rich economy only in a few decades (Valdés, 2003).

Japan’s high economic growth can be explained by a high growth rate of

manufacturing production which in turn increases the productivity and employment in
both secondary and tertiary sectors (Kitamura, 1971). The macroeconomic policies
for investment in plant and equipment (Otsubo, 2007; Miyazaki, 1982), monetary
policy to provide funds to strategic sectors (Otsubo, 2007), and the hard work of
Japanese people to imitate the imported technology according to their own system
contributed to the miraculous growth of Japan (Sasaki et al., 2010; Otsubo, 2007).
Education also played a crucial role in rapid growth of Japan along with other many
factors like political, social, and spiritual (ITṌ, 2007). The rise in investments in
computers, telecommunications equipment and software has revived the economy
from the decline of early 1990s (Jorgenson & Motohashi, 2003). The gross capital
formation, labor and technology contributed positively to the growth of Japan over the
period of 1960 to 1990 but thereafter in 1990s and 2000s, discount rates, financial

37
crisis and the appreciation of yen has diluted the sound performance of the economy
(Hamidou, 2011).
South Korea is also known as East Asian Tiger (along with Hong Kong,
Singapore, and Taiwan) because of its miraculous growth experienced during the
period 1960 to 1995 with 6 per cent rate of growth of real per capita GDP per year
(Barro, 1998). It is the sixteenth largest economy in the world in 2016 with nominal
GDP of $1.4 (Bryson, 2017). South Korea’s development seems as miracle because
it achieved a kind of structural transformation in three decades which today’s other
industrialized countries have achieved in a century (Kim & Lau, 1994). The growth of
South Korea is export-led growth for which government encouraged exporters with
direct export subsidies, tax exemptions and export loans at lower interest rates (Frank
et al., 1975). The high quality labour, remarkable growth of capital and materials has
also a significant impact on the growth of South Korea during 1962-81 periods (Yuhn
& Kwon, 2000). Over the period of 1955-1990, the growth of South Korea is
contributed by human capital, investments, and exports (Piazolo, 1995).
China, which was one of the poorest countries once upon a time, has transformed
itself into the second largest economy with $19.95 trillion GDP on purchasing power
parity basis in 2015 after U.S. in just 30 years (Yueh, 2013, CIA, 2017). China
undertook several reforms that began with the termination of collectivized agriculture
gradually, and expanded to include the gradual liberalization of prices, fiscal
decentralization, augmented sovereignty for state enterprises, growth of the private
sector, and development of stock markets and a modern banking system, and
opening up to foreign trade and investment.
Iran is the second largest economy in the Middle East and North Africa (MENA)
region after Saudi Arabia, with an estimated Gross Domestic Product (GDP) in 2016
of US$412.2 billion. The Iranian economy is largely dependent on hydrocarbon sector
which has limited the country’s ability (World Bank, 2017). The ratio of oil revenue to
GDP most significantly affects the economic growth of Iran (Mehrara & Rezaei, 2015)
and along with this savings also have a significant, positive and causal relationship

38
with growth of Iran (Najarzadeh, Reed, & Tasan, 2014; Rezaei, Tafarojnooroz, Zare,
Akbarzadeh, & Zare, 2014).
Malaysia is an upper-middle income country which is formed in 1963. Since
independence in 1957, it did not look back, and has turned 180 degrees (Hill et al.,
2013; Koen et al., 2017). The Malaysian economy has undergone a drastic
transformation from agriculture and commodity export dependent economy into the
one with more diversified, more open, and modern economy (Koen et al., 2017). The
growth of Malaysia is largely export-led growth and the shining tertiary sector due to
its ability to attract tourists.
Thailand is an upper-middle income country, a free enterprise economy, with a
relatively well developed infrastructure and pro-investment policies. Thailand has
passed its journey from low-income country to upper-middle income country with
remarkable progress in social and economic development. The quarter of Thailand’s
growth can be explained by expansion of education and credit (Jeong, 1999).
Tourism industry of Thailand is an important contributor to its growth since it provides
millions of jobs, foreign exchange earnings and a wide range of other industries
(Chancharat, 2011).
Turkey is an upper-middle income country and it is a highly free market economy
whose growth is driven mainly by its industry and service sector while the traditional
agricultural sector accounts for about 25 percent of employment. Turkey has not been
one of the miracles producing country (Pamuk, 2007). The output growth in Turkey is
due to capital accumulation not by the TFP growth (Altug et al., 2008). The energy
resource also found to be effective for the growth of Turkey as rapid technical, social
and economic development demands more energy resources (Kaplan et al., 2011).
India is a fastest growing nation among the emerging nations. It has successfully
broken the so called Hindu growth rate and now tends to converge towards East
Asian nations (Biswas & Saha, 2014). In the decade of 1990s, the nation embarked
on the path of rapid development by the opening up of economy and implementation
of liberalization, privatization, and globalization policies (Panagariya, 2004). These
reform measures on account of the market rate of interest have significantly promoted

39
economic growth of India (Chakraborty, 2010). FDI has enhanced the
competitiveness of the Indian economy through transfer of technology, strengthening
infrastructure, raising productivity, and with the generation of new employment
opportunities (Anitha, 2012) whereas, the fiscal deficit had adversely affected the
GDP growth (Ramu & Gayithri, 2016). The other determinants of growth that are
found to be significant and have positive impact on India’s growth are gross capital
formation, employment, exports, foreign direct investment and money supply (Biswas
& Saha, 2014).
Indonesia is an emerging middle-income country which did great work in the
direction of poverty alleviation with the cut in poverty rate to more than half since
1999 and to 10.9 percent in 2016. Indonesia has witnessed strong growth in last few
decades, especially after Asian Financial Crisis, with its government policy,
endowment of rich natural resources, young and growing labour force, increased
trade openness reduced output volatility and relatively stable inflation (Elias & Noone,
2011). A large part of Indonesia’s growth can be explained by the growth of its service
sector which has increased its reliance on the expanding non-tradable sectors
(Henstridge et al., 2013).
Pakistan’s growth in 1960s was led by productivity while in 1970s and 1980s the
contributors to nations growth factors inputs. The contribution of investment to GDP
growth is very small (Burney, 1986). Pakistan as a developing economy is facing the
problems of infrastructure related to its quantity, efficiency and financing (Ahmed et
al., 2013). The external debt of Pakistan has a dampening effect on the economic
growth of the nation as it makes the government hesitate to spend on the growth and
development (Rais & Anwar, 2012) and bank credit also had the adverse impact on
economic growth in Pakistan (Tahir et al., 2015). Pakistan’s economic performance is
not satisfactory on account of the negative performance of exports, external inflows,
revenue generation, tax collection, and also due to global financial crisis and floods
(IPRI, 2014). However, savings and credit to private sector played a significant role in
the economic growth of Pakistan (Iqbal et al., 2012). The policies of Pakistan are not

40
investment friendly, therefore the nation had to rely on foreign aid and debt in spite of
foreign investment (Mohey-ud-din, 2005).
The Philippines is an island which is facilitating water transport but lacked in road
and railway transport (Nelson, 2007). The Philippine economy was an enterprise
economy where the role of individualism in organization of production is prominent
(Golay, 1960). In the Philippine economy it is the private sectors and that create
productive jobs and incomes while the role of government is to create an environment
for vigorous economic activity with fiscal and monetary policies and to ensure that the
benefits of growth are distributed equally among all. Philippines is also facing the
problem of indebtedness like Pakistan and furthermore its foreign debt situation has
deteriorated more than other highly-indebted countries (Erbe, 1982; Patenio & Tan-
Cruz, 2007). Therefore, the public debt in Philippines has negative and significant
effect on economic growth (Akram, 2015).
Nepal is a low-income country and geographically it is land-locked nation between
India and China which are two giant nations (Ministry of foreign Affairs of Finland
[MFAF], 2014). The per capita GDP growth is also dim as it has increased only to
over 2 percent in 1980s and 1990s (Bhattarai, 2005). Nepal has successfully reduced
poverty from 42 percent in 1996 to 25 percent in 2010. It has also made significant
progress in access to health care, education, and drinking water. But still, 36 percent
of the population are deprived of minimum food requirement (MFAF, 2014). Nepal
economy is heavily based on agriculture and tourism; therefore it is highly sensitive to
climatic changes. Besides these two sectors, it also has to rely on the external aid
(MFAF, 2014). The remittances do not assist economic growth as it is used mainly for
consumption purpose and not for capital expenditure (Srivastava & Chaudhary, 2008;
Dhungana, 2012). On the other hand, primary education also does not affect
significantly the economic growth of nation (Dahal, 2016). The key challenges in front
of Nepal are to improve the agricultural sector with higher productivity and growth, to
increase the mobilization of domestic resources, to alleviate poverty, and to bring
social equity (Khadka, 1998).

41
2.7 Research Gaps
The literature on stated research problem reveals that the studies are available that
deals with single country analysis, multi-country analysis, and economic growth of
Asian nations. However, there are research gaps found from review of these studies
which are mentioned as below:
1. There are relatively few studies available that deals with the determinants of
economic growth of Asian region.
2. A vast literature is available for the drivers of growth of East Asia, South Asia,
and South East Asia separately but there is not a single study that deals with
the region as a whole and covers it’s all sub-regions i.e. South Asia, South
East Asia, East Asia.
3. There is no such study available in the literature which explores the drivers of
economic growth of both high-income and low-income Asian countries
simultaneously so that policy lessons can be learnt from the developed
countries for growth of developing countries so that convergence become
feasible in Asian countries.
4. There are some studies that are available on Asian growth but that can be
considered as outdated in the present time, e.g., Lee & Hong (2010) analysed
the sources of growth for the period 1981-2007. Ghazanchyan et al., (2015)
did work for the period over 1980-2012 and this study only focuses on the role
of investment, the exchange rate regime, financial risk, and capital account
openness while the variables like human capital are ignored. A recent work on
Asia is by Kim (2017) that included 18 significant variables and 52 countries of
Asia but it covers only a time period of four years i.e. from 2012 to 2016 which
is very short for explaining the determinants of economic growth.
Therefore, the present study has been taken up to explore the determinants of
economic growth in selected countries of Asia over a long period of time, i.e.,
from 1975 to 2015. This piece of research work fills the gap by suitably
combining high-income, upper-middle income, lower-middle income and low-

42
income countries to explore the significant factors responsible for the long-run
economic growth of Asia.

43