What Explains the Industrial Revolution in East Asia?

Evidence From the Factor Markets
B\
HSIEH*

This paper presents dual estimates of total factor productivity growth (TFPG) for East Asian countries. While the dual estimates of TFPG for Korea and Hong Kong are similar to the primal estimates, they exceed the primal estimates by 1 percent a year for Taiwan and by more than 2 percent for Singapore. The reason for the large discrepancy for Singapore is because the retum to capital has remained constant, despite the high rate of capital accumulation indicated by Singapore's national accounts. This discrepancy is not explained by financial market controls, capital income taxes, risk premium changes, and public investment subsidies. (JEL O i l . 016. O47, O53)

The industrial revolution in several East Asian countries over the last three decades is one of the most important economic events in the postwar era. Several recent growth accounting exercises have found that their extraordinarv rate of output growth was due primarily to an equally impressive rate of factor accumulation, with little due to technological progress. In Korea for example, estimates based on data from the national accounts indicate that the capitaloutput ratio has increased at an average rate of 3.4 percent a year from 1966 to 1990 while the rate of total factor productivity growth (TFPG) has averaged only 1.7 percent a year. To take another example, the capital-output ratio in Singapore has increased at an average rate of 2.8 percent a year from 1966 to 1990 while the rate of TFPG has averaged 0.2 percent a year.^ Since

* Depanment of Economics, Princeton University. Princeton, NJ 08544 (email: chsieh@princeton.edu). I am very grateful to J. Bradford DeLong. David Romer. and Paul Romer for their valuable advice and constant support. Pranab Bardhan. Roben Barro. Antonio Ciccone. John Femald. Richard Lyons. Maurice Obstfeld. Christina Romer. Soon Teck-Wong. Larry Westphal. two referees, and participants at several seminars also provided helpful comments. I also thank Singapore's Department of Statistics for its hospitality during a visit and officials in the statistical agencies of Taiwan. Korea, and Hong Kong for providing data and answering numerous questions. The data used in this paper can be downloaded from <http://www.wws.princeton. edu/~chsieh/data.html). ' These numbers are from Alwyn Young (1995). but also see Young (1992), Jong-Il Kim and Lawrence J. Lau (1994). 502

these studies suggest that factor accumulation has been the lead actor in East Asia's growth, many economists bave reached the conclusion tbat tbe industrial revolution in East Asia can largely be explained as transition dynamics in a neoclassical growtb framework." More broadly, tbese studies reinforce tbe message that a minimalist neoclassical growtb model, perbaps augmented witb buman capital, is sufficient to explain why some countries are ricb and otbers are poor. TTie central point of tbis paper is tbat if tbe capital-output ratio in tbese countries bas increased by tbe extent implied by tbeir national accounts, tbe retum to capital sbould have fallen dramatically as capital accumulation encounters diminishing returns." It is useful to tbink about tbis as an accounting identity. Specifically, by dividing tbe sbare of payments to capital in total income by tbe capital-output ratio, we can obtain tbe rental price of capital and, assuming tbat capital is paid its marginal product, tbe marginal product of capital implied by the national accounts. Since the sbare of payments to capital in Korea and Singapore bas remained rougbly constant, tbe marginal product of cap-

and Susan M. Collins and Barry P. Bosworth (1996) for similar estimates. " See. for example. N. Gregory Mankiw (1995) and Paul Krugman (1994). ' Young (1992) made the same observation about Singapore.

VOL 92 NO. 3

HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA

503

19M H68 1970 lTO 1974 1976 1978 1980 1982 1984 1986 1988 1990 Depositiate - - - ..Discount rate Cwb loan rale

1962 196S 1M8 1971 1974 1977 1980 I9ffi — - - Hetiini to equity Avg lending rate

1986 I9S9 1992 Kf ratio

FIGURE 1. RETURN TO CAPITAL IN KOREA

FIGURE 2. RETURN TO CAMTAL IN SINGAPORE

ital inq>lied by Korea's and Sing:^)ore's national accooifis nmst have/aikn by 3,4 percent and 2,8 percent a year respectively, the same rate as tte increase in the captal-ou^t ratio. In <iie case of Koait, thrae is oveniteb evi<^ice dut the nusginal jMtKkict of has in fact fatkn by the extent implied by die national acaxmts, Hgine 1 fdcMs doee alternative measures of the marginal {nochict of ciqiital in Kcffea, Ail duse measiHes indicate that tte tna*ghial product of capital has fdten draimtic ^ y siiKe tte 1%0's, la tfae case of Sisgi^xne, howeva-, it is highly m^Sady Aat the letma to in iiriicaled by the national accouitts, Fkst, with no lestricticms oa captal mc^ility in Singi^xxe, private investors would not have been willing to continue investing in Sk^i^xse if Aeir returns had falkD by siKh an extent, especiafly siiKe the of^irartunity cost of these investn^nts— woAd real interest rates—have nuHe dian doubled since Ae 1960's,'' More importantly, the three maiket measures of real interest rates in Singi^xne presented in Figure 2 do not provide any evidence that die return to cagitsi has faUen. This evidence suggests d ^ vAa^ die data on investment expoKlitiiFK in the Kraean national accounts are reascnsdily accurate, S^g^x»e's national accwints significantly ovo'state the amount of investment spending. Of course, Ms simply reinforces what anybody who has ever wcniced with national ac-

counte data knows: that the task of ccmiputing reliaUe n^cnal income statistics is an impossibly difficult one and that, even uiKkr die best circumstaaces, such statistics are riddled with large encnrs. As one solution to this {Ht>blem, this pi^ier presents (nice-lrased (daal) estimates of TI^G that do not rely on data frcHn die n^cmid accoants, Tli^e price-based estimates of TFPG measme tbe ootwaid sluit of iia factor price frontier as a share-wetted average of the growdi rate of real f»:tor prices. The basic idea is tlm any inqMrovenimt in technology diat causes, aa outward sUft of the production possibilities fiontio* will also cause an outward shift of die fac^r pax frcmtier. In a s mo^l wiA two fact<MS, say capital and the (wtward shift of tte factor price frontier is simply a ^iare-weig}ited average of the growth r^e of red w ^ » and die rental rate oS. cs^tal, Acccsding to the (tod growth accommng ioxmula, if real wage powdi is «itirdy due to ci^ital accumulation, thereturnto capital must fall by the same magnitude as the rate of real wage growth. These {nice-based estimates should be identical to tlK primal estimates as long as the factor price data are consistent with data fnnn the ni^mal atxoiutts,^ Fcnr exan^le, if we back out tiK r^tal rate from the national accounts by divi^ng the ca^tal slrare by the capital-ouqnit ratio and use this estimate of the rraital rate to measure die dual rate of TFPG, the resulting
^ See Zvi Griliches and Dale W, Jwgoison (1967) for an ealy expositicm c£ the equivalence between the ;ximal and (bul giowdi accounting methodologies, and Matthew D. Shapiro (1987) for an application of the dual procedure.

* The estimates of world inteiest rates cited are GDPwdgfaled averages of real interest rates of the six major industrialized countries.

capital market controls. In addition. Finally. implicit subsidies to private capital. or errors in Singapore's national accounts can explain wby tbe rental rate in Singapore bas not fallen despite tbe bigb rate of capital accumulation indicated by tbe national accounts. whereas the present paper uses the retum to equity for the aggregate economy. say capital and labor: (1) Y= wL wbere Y is aggregate output (or aggregate income). the retum to equity from the Registry of Companies used in the earlier paper was only for the jnanufacturing sector. Let us begin witb tbe basic national income accounting identity tbat national output is equal to the payments to tbe factors of production. I presented a brief review of some of tbe ideas tbat are fully developed in tbe present paper. Differentiating both sides of equation (1) witb respect to time and dividing by Y. Sections II and III implement tbis metbodology using data on wages and returns to capital for tbe four East Asian countries. and K is capital.* Tbis paper also presents several cbecks for tbe robustness of tbe results (wbicb were not presented in my earlier paper). the two measures of real interest rates in Singapore are slightly different from that used in my earlier paper. tbe estimates in tbe present paper make use of updated and more reliable data on factor prices in tbese countries and tbus supersede tbose presented in my earlier paper. In an earlier companion paper (Hsieb. In tbe case of Korea for example. dual rates of TFPG are constructed from tbese sources. Section I develops tbe metbodology of tbe dual approacb to growtb accounting.is tbe real wage. Finally. Sections IV and V assess wbetber cbanges in tbe risk premium. r is tbe real rental price of capital. L is labor. The Dual Approach to Growth Accoundng Tbis section derives tbe dual growtb accounting procedure from tbe basic national income accounting identity tbat national output is equal to payments to tbe factors of production. 1999). tbese estimates of TFPG will be identical to tbe primal estimates if tbe alternative estimates of tbe rental rate are consistent witb tbe rental rate implied by tbe national accounts. In contrast. taxes on capital. as well as detailed evidence to assess wbetber tbe return to capital in Singapore bas fallen by tbe extent indicated by its national accounts. the estimates of the rental price in this paper are computed from fitting a time trend to the rental price estimates. we get: (2) Y = Sgif + k)^ si(w + L) wbere 5^^ = rKIY and j ^ = wLlY are tbe factor " I thank Susanto Basu and John Femald for this deriva- . Tbe paper is organized as follows. we can use alternative measures of tbe rental rate to obtain estimates of TFPG tbat do not rely on data from tbe national accounts. I. tbe dual estimates of TFPG in Singapore are significantly bigber tban tbe primal estimates because tbe rental rate bas remained rougbly constant despite tbe sharp increase in tbe capital-output ratio indicated by tbe national accounts. Section VI concludes.' Tbe dual growtb accounting decomposition can also be derived from tbe properties of tbe cost function of any production function. Again. Tbe advantage of using tbe national income identity rather tban tbe cost function approacb is tbat tbe national income identity derivation makes it explicitly clear that tbe equivalence of the dual and primal procedures do not depend on any assumptions about tbe underlying tecbnology or market structure. In addition. tbis paper provides a complete documentation of tbe data sources and a detailed explanation of bow tbe factor prices used to compute tbe * In addition to using more recent data to compute the rental price estimates. Specifically. H. tbe paper sbows tbat tbe dual estimates of TFPG are ver\' similar to tbe primal estimates since tbe alternative measures of tbe rental rate in Korea bave fallen by rougbly tbe same magnitude as tbat indicated by tbe national accounts.504 THE . However. whereas the estimates in my earlier paper are simply averages of the annual growth rate of the rental price (calculated every year).AMERICAN ECONOMIC REVIEW JUNE 2002 estimate will be exactly tbe same as tbe primal estimate. the eamings-price ratio for Singapore used in the present paper is the E-P ratio for companies in Datastream's total market index for Singapore. which is a broader basket of companies than the Straits-Times index used in my earlier paper.

+ i. Ae diffoence between the dual smi naticmal income sxounting idmtity and dividing by Y yidds f = SgHf + k) + s^iw + £) + j . and s. Ae ciqntal share is measured as theresidujdof latxH* iiK^ne. # .. the relatiosship between Ae two estimates of the Solow residual is SR^^i^^i = SRj^. Typically. '' Since the labor share has remained roughly constant in all four countries.prices (4) are ccmsistent wiA those fixmi Ae national accounts. pffitioilarly wiA a standard estihave the result dutt the ptimBl ZBA di»l m^mate of tte i»0fit share of roughly S to 10 sures of the Solow residual ase equal. since we have better data oa labor income. = ir/f is the profit share. The two measures of Ae Solow residual can (6) difier when national o u ^ t exceeds Ae payments to cental and Idboi." Therefore. We do IHM but raAn due to inconsi^encies between Ae even need to assume that the data is conect. Ifence. vAere Si_ = estimates depeiuis on how tte csqatal wUY is die labor share. To nological cteinge. Since the sum of Ae c ^ t a l share aoid Ae profit (5) share in all Ae four East Asian countiws has remained r o u g ^ constant since Ae 196O's. S^). we get: share is measured. Suppose. 3 HSIEH: THE INDUSnOAL REVmATTKW IN EAST ASIA 505 inccane shares. When IT is positive. For data fimn Ae nationd accounts ai^ the factor examfde.VOL 92 NO. and their social m a ^ a l {socfacts. or relationship between factor prices ccMnpetiticm or omitted factors of production. the sum of die c^tal and profit share (which is cme minus the labor share) must have remained unchanged as well. ' There are (at least) two possible intainetati<»is of ir. Ae two sets of TFPG estimates will be dual measure of the Solowresicihialis the Ae same as i<Hig as Ae growA ntte of the capishare-weighted growth in factc^ i»ices: tal share is equal to Aat of the profit share. s^ ~ rKIY is the "true" c^>kal share. we mal e^imites.h) where 5^ ^ ir/Yand 5^^ = rK/Y. No other percent of national inc(»ne. a circumflex over a variable denotes the pn^octioBal growth rate. this estimate of Ae capital shsae is equal to Ae "true" capital share plus the profit . Aat Ae national income accounting identity is given hy Y = rK + wL + ir. for example. I assume tteit the agpi^ate rraital pdce put uid factor price (kta are ccmsistenily WKH^ of capital is itself a wei^ted avraage of the the dual nnasure of the Solow re^duai will be rental pace of different types of cs^stal: exactly equal to Ae prsnal me^ure and consequently.^'' Therefore. with only the share have chuiged l^ enough to result in a significmt (fiffoence bkween the dual and pricondition dastt o u ^ t ^uak factcn: mcomes. is the expre^ioa aa Ae unlikdy Aitt the capital share anl Ae profit right side oi eqrtBSkm (3). When we use 1 — wLlY (instead of s^ as the capital share for the dual and primal estimates. - ^ In this papa. equally biased. as long as the data CKI factCH.^ By placing the terms involving the growth rates of factor cpiantities on the lefthand side of the equati(m. When this biased estimate of Ae capital share is used to calculate Ae dual and primal The primal estimate of Ae Solowresidualis the estimates of Ae Solow residual. it is It can be seem that SRpri^i is the expresaon on tlK left side md SRa^^. if the capital Stack dsia is wrcaig.(f. as kmg as the outdo this. Ae primal esgrowA nds of o^nit after suiMracting Ae sharetimates will exceed Ae dual estimates by weighted growA in factor quantities: s^(S^ . any assunqitions are needed for Ais result: we do iK>t need any assun^tions abcHit die form of die differeiKe between the dual and ^imal esti{voducticm function. primal estimate of the Solow reskhial will Hw dufd procedure can he easily extencted to cleaiiy be a biased estimate of a^regate tediallow f(M. Howev»-. An alternative interpretation is that ir are the paymeitts to the foctors of production omitted fiom the growth accounting exercise.SLL = Sgf + (3) share. the price data. One interpretation is thatfirmshave market powa and ir are their profits.different t^>es of lahcn: and ci^^al. bias of technological mates of I W G is prc^bly not due to imperfect change. .' When this is '° Taking &te time derivative of bodi sides of this new the case.

Tbis equation states tbat tbe rental rate of capital goody is equal to tbe product of its relative price and the real interest rate plus tbe depreciation ' ' This procedure.equipment. Measuring Factor Prices and Factor Shares (7) 1= ! S. Tbe aggregate wage is also a weigbted average of tbe wage of different types of workers: justment costs are clearly important for sbortrun estimates of TFPG. Wbile tbis is a reasonable assumption in tbe long run.'^ Altbougb average real wages in East Asia bave increased because tbe average worker is better educated. Hall-Jorgenson (1967) rental price formula: (8) wbere pj/p is tbe relative price. altbougb tbe aggregate rental price of capital may be affected by cbanges in tbe composition of tbe capital stock. II. tbe dual framework for estimating TFPG assumes tbat producers are in a long-run equilibrium in wbicb tbe quantities of factor inputs are at optimal levels. nonresidential buildings. Finally. does not adjust for possible improvements in the quality of education. transport equipment. . wbere tbe weigbts are tbe sbares of payments to eacb factor. but tbe resulting bias in tbe growtb rate of real wages in tbe dual calculation bas tbe same effect on tbe growtb rate of real output in tbe primal exercise. one possible explanation of bigber real wages in East Asia is tbe improvements in labor quality. Tbe rental price for capital goody is based on tbe standard Robert E. p^ tbe inflation rate. Turning to tbe rental price of capital.''' Real wages of workers are differentiated by sex and by educational attainment (from four to six educational categories. wbile ad- Tbe dual rate of TFPG is calculated as a weigbted average of tbe growtb rate of different types of capital goods and wages of different types of workers. tbe estimates presented in tbis paper do not make any corrections for adjustment costs. To compute tbe growtb rate of real wages. adjustment costs due to temporary sbocks can drive a wedge between tbe rental rate and tbe marginal product of capital and tbus bias tbe dual TFPG estimates in tbe sbort run. Tbese last two equations adjust for quality improvements in tbe aggregate capital and labor stocks by using tbe sbares of payments to eacb factor input to weigbt tbe contribution of cbanges in tbe price of eacb factor input.506 THE AMERICAN ECONOMIC REVIEW JUNE 2002 wbere 5^ is tbe sbare of payments and r. however. particularly due to rising educational levels.Appendix provides additional details on the data sources. tbe growtb rate of aggregate wages in equation (7) will be zero as long as tbe real wage of a worker witb a given level of education does not cbange. Tberefore. '. otber construction. Equation (7) adjusts for tbis by measuring tbe wages of a given quality of labor across time for many different types of workers. For example. Tbe GDP deflator may be an inaccurate measure of tbe price of aggregate output. Similarly. tbey sbould not affect estimates of TFPG over tbe 20. However. is tbe growtb rate of tbe rental price of type / capital. tbe quality-adjusted aggregate rental price of capital [as computed in equation (6)] will not cbange as long as tbe rental price of eacb type of capital remains uncbanged.to 30-year time period analyzed in tbis paper. and macbiner\. W: wbere 5^ is tbe sbare of payments and w^ is tbe growtb rate of wages of a worker of type /. I calculate tbe rental price of five categories of capital goods: residential buildings. Tbe difference between tbe growtb rate of average wages and tbe wage index in equation (7) can tberefore be interpreted as tbe contribution of cbanges in labor quality. I subtract tbe growtb rate of tbe GDP deflator from tbe growtb rate of nominal wages of eacb type of worker. and / is tbe nominal interest rate. and 8y tbe depreciation rate of type j capital.The Data . depending on tbe country) computed from bousehold surveys and tbe population censuses in tbe four countries.

' ' H d (1990) uses a similv {socedttre (he uses the dividend-price is6o as a real inteRst rMe) to calculate the rental pdce (rf c^iilal. I ose die c ^ money rate and die ben lemSng rate (tf die Hoi% K(nig and S h a n ^ Bmk.calculating the real interest rate. by asmmpdon. is be piesem value vt de. To calcidate therealrental price (rf «idi ciptai good . as loag as their b^as and correqx»ding risk pf^ranium do not c h a i ^ over ibe 20-30-year tinw poiod anidyzed in Ais p^er. One approadi is to assume Aat all assets earn Ae same ncraBsd retisn aid siAtnK. and 13. and /^ is tile effective r^e di the inveament tax crediL I do not have oxiqgli infonnaiion aa tax pd&xs in these coumries to cdcnltfe tax-ai^usted r^al pikes.aedalioii dediKtHXB. For Hoi% Kong. not fw each type of ciqntal). I cagwK adt^ any of tbeir "internal rate of rdam" speaActtioos since I < > not have a direct k measioe of tte iacome accraing toeach type of c^tal good (Harpo: et al. u is tfae corporate ioBome tax rale.8 percent for madiinery equqnnent. I ased Ae mamnalreturnsof an asset v^ose returns are perfectly ctvrdated wiA the retiims of tte country's capital stock. the rental price of type j capital is given by whoe bj is the effective rMe of pn^ioty taxes. The procediBe I use of calculator the real iiderest rale by subtracting eiqiected inflaticm &om a nommid rate is Uatpa et al. the growth rate cf their nominal returns will equal the gmwth TXte of nomimd returns tive basket d Ae coaiaiy's capital stock.9 pracent fot nonresidential buildings. md the &oaaat rstte on cammmial Islls. my altemative fvocedme of nsii^ die E-P naio anl the retian to equity as die real rate (rfietum d taiA capai good is a coarinnation of an "imRnal tmeofTetam" ami an "extenal nominal nde of retum" specificati<n. the knn rate CHI sectKcd toras. I use Ae ncxndnai retims oi a number oi cUfferent assets. AnotlKr ^^oach is to use a mffik^-d^enmned real ntfe of return such as tlM etmings-price (E-P) nuio. I use two medK>ds to do this.^* I disc u s each s^^roach in tnm.t Ae rate of asset i»ice iniationfromAis iK»ninal rate. " The depreciation rates are 1. However. cakwlatt an intonal rate of return for each sector. Second. Since I do not \es?n such an asset. I need e^imates (rf Ae retative pckx of capital (jfjlp).3 percent for residential buildings. In Singapore. 2.'^ TM defsreci^m rate c o ^ sdso be wcaaesx. Hndly.2 pocrat fot tiaaiportatian equipment. it cleariy dees not imdce smse for me to «se Hu^per et d. I use die curb madcet k m rale. Wyk(« (1981). "fte ididve price of c^tal is meaaired as the rado oi Ae investmrait goocb deflator (rfeadi capiud good ovfx Ae GVP ^e&HaxfrmnAe n^kxral acoQuits. 18. Whoi iBos is not the case.p^. since the E-P ratio and the retum to equity is die internal rate of retum of the firms covered by these measures. aad Ae real intnest rate (i . the defseeiatirai rate (5y).. fbeae five metfaods can be categorized as eiUwr n exmad rate of r^Bm ^«ci&«tkn or an intonal rate of retum ^edflcatifm.'^^ A l A o i ^ the rettims on tl»se assets are not pafec% a»rei«ted wiA those (rf a re{nesentative l»sk^ of die coantry's ciq»td stock.'s "cnotant extemal nMe of renm" qieciflcttim since. " Spedflcally. However. Ae cae-year time deposk att. but dK s£ane enm will be re&cted m Ae giowA rate of Ae real c^tal stock is the priaial exercise. thereadtingInas in tfK growA rate of Ae rrattid piice will be exacdy the sanK as dK enor in Ae growA rate d d»realci^^al stock. raiding from '''It is straightforward to ^just the Hall-Jorgenson rental jmce formula in equation (8) to incraporate the effects of taxes. aiKl die duce-numth treasury bill yield in Taiwan. Third. ailomng for the ^fect of taxes. tbe defseckitot nMes (^ Ae five cap&A goods are tidceo fiom Chmles R. Altficx^i Aty present five different proce^ires for dofa^ Ms.1 percent for other coBstructicm.'^ To e^mate Ae real iatoest rate hy »ibtracting tiK rMe of asset pace inflationfiroma nominal iirtoest rate. I also need estiiaates of real interest nrtes to calculate the real rrait^ i»ice (A cwp^. In addition. I rae ag^i^att data oa coipnnrie incone taxes in ^ogapoR to asge^ die exloit to nttcb w^ eslimittes of dK reoM price (^ c^Mtal hi Siagsvoie are Uased becanse I do not make an adjustmrat fix taxes. The investmsBH goods d^tfor may be inaccunrte and Tesaili in irasteacKng estkmites <tf the real roital price of ciq>M. equation (8) reduces to the fatmUar expression Aat Ae real rental price of capital is Ae real inmest rate {dus the ^|»eci£ttion nrte. I ose tfae l o u ratt in infonnal financial nuric^s. " See Nfidnd Harpa et al. z. (1989) for a ccnnpiehensive discussion of ahraaative nmhods fin. Hid)Qi fflid Rrmdc: C. 2. tbe one-year time deposit rate. dss iax>ceditre (xecludes me from usmg market data to measioe die extent to which dK retiBn to c^tal has changed in tlie four East Asian coiKttnes. in Sectkn IV. Specifically.VOL 92 NO.'s "extnnal notninal rate of retnni" specificatkm. but Ae esthiuited growA rate di Ae rented price of ca^^ will be unaffected as long as Ae ^^ between ctdion rae md ^ ttue valse does not diapge tiii». 3 HSIEH: THE lNDUSTUAL REVOWlVm IN EAST ASIA 507 rate. I use the avra^e lending tale of conmercial bndcs.*"* When the relative price of capital is 1. . I tatve sevoal measures of nominal intei^t rates for each c(wntry. For Koiea.

However. The resulting estimates of TFPG using the ex ante expected real interest rates are very similar to those using ex post real rates and are therefore not presented in the paper (but are available upon request from the author). pp. differentiated by sex and education) is calculated as the product of the average wage and the number of workers in each category divided by total payments to labor.'® I also estimate real interest rates by using market-determined real interest rates. = /. and tbus provide a reasonably accurate measure of tbe aggregate retum to capital in Singapore. in 1953 for Korea. More generally. -"See Richard Brealey and Stewan Myers (19%. I assume perfect foresight and subtract the average ex post rate of asset price inflation from tbe nominal interest rate. As previously mentioned. I assume tbat the growtb rate of investment before tbe beginning of tbe investment series is equal to its average growtb rate in tbe first five years tbe data is available. I also estimate the ex ante expected rate of asset price inflation by regressing the realized rate of asset price inflation on lags of the inflation rate and other explanatory variables. the real interest rate will exceed the E-P ratio. for tbe firms tbat bave extremely profitable investment opportunities. gi is tbe growtb rate of investment in tbe first five years. in 1960 for Singapore. tbere are also firms wbose investments are expected to yield retums tbat are below tbe market rate tbat sbould compensate " To check for sensitivity. so I bave 6 to 16 years of investment data to establisb the capital stock. In contrast. tbe estimates presented in tbis section uses tbe ex post realized -' I use Young"s (1995) estimates of the aggregate share of capital and labor in total income. tbe estimated capital stock is relatively insensitive to tbis assumption. -I. the estimates of tbe retum on equity in Singapore are compiled from annual reports filed by every incorporated business in Singapore.508 THE AMERICAN ECONOMIC REVIEn' JUNE 2002 lending rates of commercial banks to interest rates in informal financial markets. the real interest rate is equal to the E-P ratio divided by (1 . it will understate the real cost of capital if tbe firm is expected to make investments that yield retums above tbe market rate. tbe dual rate of TFPG is calculated as a weigbted average of tbe real rental price of five types of capital and real wages of workers differentiated by sex and education. As measures of tbe real interest rate. The publisbed investment series begins in 1951 for Taiwan. The capital stock at the beginning of tbe period is thus computed as A". If the present value of growth opportunities is positive. is tbe depreciation rate.) wbere /. m . 67-69). The E-P ratio in Hong Kong and Singapore measure tbe retum to capital of firms listed in tbe stock markets in tbese two economies.metbod witb geometric depreciation. To estimate tbe share of payments of eacb type of capital.S. and S. . then the real interest rate is given by r = (E/P) + g where g is the expected growth rate of dividends (and earnings). and in 1961 for Hong Kong. As a reminder to tbe reader. I take tbe product of tbe nominal rental price of capital and tbe estimated capital stock and divide by tbe total payments to capital. r will exceed the E-P ratio when g is positive. tbe sbare of payments to different types of worker (again.present value of growth opportunities//"). tbe E-P ratio is a good estimate of tbe real cost of capital wben tbe companies are only able to invest in projects tbat yield tbe market rate of retum./(^. is quantity of investment at the beginning of tbe period. Turning to tbe factor shares. I first estimate tbe stock of tbe five types of capital using tbe standard perpetual inventory. Dual Estimates of TFPG Tbis section presents tbe dual estimates of TFPG for the four East Asian countries. I use tbe E-P ratio of firms in tbe stock maikets of Hong Kong and Singapore and direct estimates of the return on equity from the firm-level records in the Singapore Registry of Companies. but tbese firms are clearly not a representative sample of firms in tbese economies. In this case. wbere tbe weigbts are tbe sbares of payments to eacb factor. and can check tbe sensitivity of the dual estimates to these different measures. To calculate a real interest rate from these nominal interest rates. in tbe cases in wbicb tbe real interest rate is computed by subtracting tbe inflation rate from a nominal interest rate. Given a long investment series and a positive rate of depreciation. Using their terminology.-' To compute tbe shares of payments to eacb t>'pe of capital. I focus my analysis on the post-1966 period. witb tbe exception of partnerships and self-proprietorships.^° On the otber band. If earnings are fully paid out as dividends.

07 5.26 5.67 3. tte rate of dual TFPG is the wei^Ued ^owtfi rale of quality-a^sted real wages and rental price of ci^tal.38 Dual TFP 1.511 0.16 1.511 -0.07 1.30 2. Nominal interest rates have fallen steadily over this poiod. The fall in real interest rates was acconqianied by a decline in the relative {sice of cs^tal (averaging 1.511 0.70 1.4 percent a yeffl.96 4.61 1. excqx tbe panel "SingqxHe (comtant real interest rate)" which assumes th^ the sum of the real inler^t r ^ and tbe defaeciaticm rate has remidned conaant. To calculate the growdi rate of rraital rate.703 Rental pike of ca^al -3.511 0.41 -4.14 2.36 3.60 2.69 -0.13 -1.69 -0.4 percent from 1966 to 1990.616 -1.739 0. Using dK oiK-ye^ time deposit rate as the nominal intraest rate. which forther decreases dw real retrial price of ci^td.63 1.34 0. All o&ameaBHes of Merest rates aie used as nmianal interest raies.12 1.17 2.36 -0.78 1.05 4.67 3. Siacs the point estimates of the time trend are relatively insensitive to different initial and end points. the faU in the nomii^ invest rMes translates into a decrease in r ^ interest rates.52 2.fii28 0. 3 HSIEH: THE INDUSIJOAL REVOWTION Of EAST ASIA TABLE I—^DUAL TOTAL FAcrrai PRcoucnvmf GROWTH 509 Annual growth rate of: Real iittraestrateused Korea Curt) market loan ate (1966-1990) D^josit rale (1966-1990) Discount rate (1966-1990) Singt^mre (actual real interest rate) Return on equity (1971-1990) len«ag mat (1968-1990) E-P ratio (1973-1990) Singapore (constant real interest rate) (1971-1990) (1968-1990) (1972-1990) Hong Kong PrinM lending rate (1966-1991) CaU money rate (1966-1991) E-P rajk> (1973-1991) Taiwan CiHb loan rate (1966-1990) Ctae-year (teposit rate (1966-1990) Seemed loanrate(1966-1990) Tinee-mMith treasury bill rate (1975-1990) Labor share 0.95 -3. tte dual TFPG e ^ mates in South Korea are roughly dK same as the primal estimates.739 0.66 O. real interest rate.79 3.60 2.18 0.70 0.89 -0.26 5. die dual rate of TFPG is much lower due to the steep decline in the return to cental over diis period (see Figure 1).70 Notes: Tbe return to equity and E-P ratio soe usedas leid mterest rates.739 0.64 -0.30 2.VOL. dK growdi rate of TFP averages 2.22 -0.92 2. Primal TFPG and aggregate factor shares are calculated from Young (1995).628 0.511 0.53 0. where the weights are ihe factor shares. TaMe 1 isesents die esdmsttes of duidTPPG.511 0.01 -2.703 0.frran 1966 to 1990). For all die estimates. Without any sqqneciable decline in die rate of asset inflation.91 2.66 -0.87 3.20 1. AlAough real w^es (in quidity-adjusted units) ^ew at an annual rate d 4.703 0. 92 NO.38 4.26 5.07 -2.70 1.79 3.firmnwhich tbe ex post inflation rate is subtracted to obtain the real mtoBst me.1 perceiu a year from 1966 to 1990.63 3.65 1.6 percent a year).05 4.91 Wages 4.38 4.62 Plioud TFP 1. The first paiul presents d » climates for South Kot&L As iK)ted earlier.60 2.22 -0.98 2. I divide the pmnt estimate of the time trend of the smn of ^ real inlnest nte and the dqprecit^n ntte by its average value «ad add Ilus to the av^age ^owth rate of d^ relative poice of cifHtal. "Die main {soblem with using the one-year c^Kisit rate ami die discount rate cm commercial bills as nominal interest rates is that these rates .50 0.79 2. Using die dKcisunt rate <»i ccHiimercial bills yields a s l i ^ y lowerrateof THHj (1.17 2.746 -0.60 3. the dual e^imsUes do not significffiitly c h a i ^ wten difEnent initial and t»minal years are used for die dialysis.

3 percentage points) when the E-P ratio of firms in the stock market of Singapore is used as the real retum to capital. The interest rate in this unregulated market. and consistently exceed these estimates by about 2 p)ercentage points a year. one can see that these estimates are virtually identical to the primal estimates (fourth panel in Table 1).4 percent a year) to that obtained when using the deposit rate and Ae discount rate as Ae nominal interest rate. A solution is to use Ae interest rate in infonnal financial markets Aat were not regulated by the government to calculate the real retum to capital. is always significantly higher than Ae oAer interest rates (see Figure 1). When the average lending rate is used to compute Ae real retum to capital. we obtain a higher dual estimate of TFPG for one of the three estimates and a lower estimate for the remaining two estimates (see the third panel in Table 1). The combination of an annual 0. the dual rate of .03).510 THE AMERICAN ECONOMIC REVIEW JUNE 2002 were set by government fiat for a significant period of time. Ttiming to the dual estimates of TFPG for Hong Kong. the (quality-adjusted) real retum to capital falls by an average of 0. this is not the case for the three estimates of the time trend of the real interest rate in Singapore. In addition. which is why I begin my analysis in 1968 when using the average lending rate to calcuiate the rental price of capital. With a labor share of 0. Lastly. quality-adjusted real wages increased by 2. the growth rate of the rental rate is simply the average growth rate of the relative price of capital.02 percentage points each year. the rate of TFPG (1.'' Over the same period. the increase in the rental rate would be lower if I had used the average gap from 1968 to 1980 to estimate the average lending rate after 1980.63. due mainly to Ae fact Aat Ae rental rate of capital has not fallen. since the data on the average lending rate is not published after 1980. the rate of dual TFPG exceeds the primal estimates by roughly the same amount (2. Using the prime lending rate (from the Hong Kong and Shanghai Bank) as the nominal retum to capital. Using this as an estimate of the growth rate of the rental rate.2-percent decrease in the real rental price with an increase in (quality-adjusted) real wages by 3.9 percent a year) is broadly similar to the two oAer dual estimates and the primal estimate of TFPG. As previously mentioned.81 percentage points) to the prime lending rate as an estimate of the average lending rate after 1980. which exceeds the dual estimate by 2. Therefore. After adjusting for labor qualit>% real wages increased by 4 percent a year.4 percentage points higher Aan Ae primal estimate. wliich is 2. the rental rate increases at an average rate of 1. but the trend is not significantly different from zero (the standard error is 0.2 percentage points. this measure is compiled from annual repons filed by ever}incorporated business in Singapore with the Registr>' of Companies (with the exception of partnerships and self-proprietorships).6 percent a year from 1968 to 1990. but the percentage decline in the real retum to capital is roughly similar ( . the real rental price of capital fell by 1. Since the average gap between the two lending rates in 1979 and 1980 is lower than that in previous years (average of 1. I add the average gap between the average lending rate and the prime lending rate in 1979 and 1980 (0. the dual estimates of TFPG (shown in Ae second panel in Table 1) differ dramatically from existing primal estimates.2 percent a year from 1971 to 1990 yields an average rate of TFPG of 1. an altemative approach is to assume that the sum of the real interest rate and the depreciation rate in Singapore has remained constant. AnoAer measure of Ae retum to capital ~ The data on the average lending rate is first available in 1968 from the Yearbook of Statistics Singapore. Nevertheless.2 percent a year from 1971 to 1990. Since the trend of real interest rates in Singapore is not statistically different from zero. this implies that the rate of dual TFPG averaged 2. in Singapore is based on estimates of the retum to equity from Singapore's Registr>' of Companies. Using the retum to equity from this source as the real interest rate. Since the labor share is roughly 50 percent. The return to capital computed from the average lending rate in Figure 2 combines the data from this source with comparable data on bank lending rates from Sheng-Yi Lee (1974) for the period prior to 1968 (additional details are provided in the Appendix).7 percent per year. I should note that while the three estimates of the time trend of real interest rates in Korea are statistically significant. The point estimate from a regression of the gap between the average lending rate and the prime lending rate from 1968 to 1980 on a time trend indicates that this gap grew by 0.2 percent a year from 1968 to 1990. With this assumption. all three alternative estimates of the dual rate of TFPG are still significantly higher than the primal estimates.3 percent a year from 1966 to 1991.5 percent a year. the curb market loan rate. Tuming to Singapore.27 percentage points from 1968 to 1978).

5 pocent highra.62 SingifXHe (1972-1990) 4. 92 NO. since tits labor share in Taiwan has renumed r(Mig^y constant. Turning to stock market indicators of the return to ca^tal. " ^ecificalfy. and real wages from the sources desoibed in die ^ d i TFPG averages 2. Ae Survey of Personal Income Distribu(icM {irovfaies data <» Hic<»Befiromseccn»lary jobs as well as Aat frran the poson's primary job. I used die Survey of Personal Incmne Distribution for die e^imates [nesented in this p^)er since it {vovides mote c(»tq»ehensive and higha quality measures of inccniK than the Survey ofManpoyver Utilization. the growth rate of real w^es implied by the naticHial accounts is simfdy die growth rate of output per woiker.20 4.8 percent a year (using eiAer the loan rate in iaformal iiiumcial mokets or the treasury bill nte).^^ The av«age rate of dual TFPG from 1966 to 1990 is die highest of die four countries. ^ Youi^ notes that Taiwan's national accotmts incorpo^ rate a "quality adjustment" to o u ^ t of {niblic sector employees. In contrast to Sing^ioie.18 HongKmg (1966-1991) 4. Smce (qualityadjusted) real v/a^s grew by 4. r^iging from a low of 3. idbeit by less thmi in Singapore. The growth r^e of TPP is dterefore smaller once an adjustment is made to the measure of public sector output to ccnfon to te standard (xem qu^ty a^/ataatm) me^urem^t technique. The four estimates of the rental [nice of coital shown in T^le 1 suggest that the marginal product of c^tal fell from 1966 to 1990. I adjust the growdi rate of the GIS* deflator to renMve the "quality adjustment" of public sectcv ouq>m. T^le 2 diows diat the growdi rate of real wages in Taiwan (comfHded from housdiold stnv^s) exceeds the growth rate (Mitput per worico: (c(Hiq»ited from the national accwmts) by 1. and also provides data on annual income noher dian mcmthly income.4 percent a year (using die interest rme (xi secured loans) to 3. the The ftgoies pmeMed in Table 2 are not adjusted for in labor c^dity mid dins differ slightly ihnn the figures pRsoited m TjMe 1 (whidi <to adjust fw changes in l d x s quality). Although dK interest rate on seciB«d loasas and die one-year d^x>sit rates were subject to govemmoM contrtds imtil the early 1%0's. which ccstoborates die (toafrconthe naticffial accounts diat imiic^e an inoease in the c£^tal-ou^ut ratio over die same tinut period. The last panel in T^le 1 presents the estimates of TFTG for Taiwan. The estimated rates of TEPG are relatively inseiKitive to die choice of nomii]ial intoest rates. The growth rate of the adjusted GES> deflatw is 0. the E-P ratio suggests that tte leaXal i»ice of capital i»:reased at im average rate of aimo^ 1 pocent a year ftom 1973 to 1991.1 percent a year. Growtfi ntte of o u ^ t per woricer calculated fn»n Young (1995). Specifically. die between the dual ami pmnal estinurtes in Taiwan is not ^le to diffnences between the measiues of the rental price of ci^ital ^lown in Table 1 and diat implied by nati(»al accounts.^ Nonetheless.12 Notes: Growth rates of output par worker and real wages are not ac^uted for qdaBQr. a household survey c<»KliK:ted annually since 1976. .90 5.3 p«cent a year.7 pocent a year).9 percent a year ftom 1973 to 1991 wten die E-P ratio is used as a real interest rate.30 5.2 pa%»it a yesff. the e^im^ed rate of dual TFPG is 2. To account for dus ia the (hial piocedwe. which explains dmost all ^ discrqimcy between the dual fflid primal estimiUes of TFPG for Hie natural (piesti<Mi is whether the house- hold survey (dK Survey of Personal Income Distribution) used fas die estimates presented in Table 1 ovostaie die growdi rate of real wages in Taiwan. H e dual estimsttes in Taiwan also exceed die I»imal estimates.70 4.VOL.than that of die unadjusted deflator. the g ^ betwe^i the two measwes of ITPG is entirely due to sm iaccmsistency between the growth rate of red wages axnpited from hcmsdiold surveys in Taiwan aad diat inqilied by die n^onal accounts.77 Korea (1966-1990) 4. die l^iding ritte in inf(Minal financial ooarkets yields very similar estimates of TFPG (3. An alteoiative source of data on wages by educational attainment in Taiwan is the Survey of Manpower Utilization. Inste»l. 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA TABLE 2—CcftffAWSON OT GROWTH RATE OF REAL W A ^ S AND OUTPLT PER WORKER 511 Avenge annual growdi rate of: Ouiptx per worker Real wages Taiwan (1966-1990) 4.

market-determined real rates are typically less volatile tban real interest rates obtained by subtracting an expected inflation rate from a nominal interest rate. TV. However. As can be seen."* As can be seen from tbe ranges of tbe rental prices in Hong Kong and Singapore. to assess tbe extent of and impact of tbis volatility on tbe dual rate of TFPG. covering different concepts of income in different years" (p. and are significantly bigber tban tbe primal estimates in Singapore. tbe results are still similar wben one considers tbe confidence interval of tbe estimates ratber tban simply tbe point estimate of tbe dual rates of TFPG. I remind tbe reader tbat tbe aggregate rental price of capital is computed as a weigbted average of different types of capital goods. I present two additional robustness cbecks. Nonetbeless. In addition. but tbe gap is relatively small and tberefore would not make mucb of a difference in tbe corresponding dual estimates of TFPG. it is clear tbat tbese estimates of tbe real interest rate are ver\' volatile. 42). Table 2 shows that with the exception of Taiwan. However. the resulting estimates will be very similar to those presented in this paper. rental price of capital using tbis procedure (tbe "simple" rental price of capital) for one measure of tbe real interest rate for each country. if the growth rate of output per worker is used as an estimate of the grow th rate of real wages to calculate the dual rate of TFPG. the growth rate of output per worker from the national accounts is virtually identical to the growth rate of real wages computed from household surveys and population censuses in these countries. Since tbe labor share in these three economies bas not changed. In turn. Appendix Table Al presents tbe growtb rate of tbe -'' These estimates are not presented in the paper. tbe growtb rate of tbe "simple"' rental price is sligbtly lower tban tbe "quality-adjusted" aggregate rental price of capital for three of the four rental rates presented in tbe table. As anotber robusmess check. I calculate the confidence intervals of the growth rates of the rental prices and dual estimates of TFPG as well as their point estimates. .^' Finally. Hong Kong. I remind the reader tbat tbe estimates of tbe growtb rate of tbe retum to capital presented in Table 1 are obtained from fitting a time trend to my estimates of tbe aggregate rental price of capital. but are available upon request. It's also wortb mentioning tbat tbe growtb rate of output per worker is virtually identical to tbe growth rate of real wages in Singapore. "^ Young (1998) argues that the estimates of real wages used in this paper are problematic because they are derived from "different weighting procedures. tbe dual estimates for Korea are very similar to tbe primal estimates since tbe -* I thank a referee for this suggestion. combining data from different sources.^^ Tbe evidence from tbese two bousebold surveys suggests tbat tbe discrepancy between tbe dual and primal estimates for Taiwan is probably due to an underestimate of real output growtb by Taiwan's national accounts. tbe dual rate of TFPG are rougbly similar to tbe primal estimates in Korea and Hong Kong. tbese sbares are computed by estimating tbe quantity of each type of capital using a standard perpetual inventory' approach and multiplying by its estimated rental price. Has the Return to Capital in Singapore Falien? To recapitulate. this indicates that any discrepancy between tbe primal and dual estimates for tbese countries is largely due to the inconsistency between market measures of tbe rental rate used in tbe dual analysis and tbe rental rate implied by tbe national accounts. Tberefore. especially wben tbe real interest rate is computed from subtracting an expected rate of inflation from a nominal rate. wbere tbe weigbts are tbe sbares of payments to eacb type of capital. An alternative to using tbese estimates of tbe capital sbares to construct a quality-weigbted rental price of capital is to simply calculate tbe rental price of capital as tbe real interest rate plus a constant depreciation rate. Appendix Table A2 presents tbe 95-percent confidence inter\'al of tbe growtb rate of tbe rental price of capital and the corresponding ranges of the dual rate of TFPG for the four East Asian countries.512 THE AMERICAN ECONOMIC REVIEW JUNE 2002 growtb rate of real wages from 1976 to 1990 from tbe Survey of Manpower Utilization is similar to estimates from the Surx'ey of Personal Income Distribution. First. Therefore. these problems are also present in the national accounts. and Korea (see Table 2). are sligbtly bigber tban tbe primal estimates for Taiwan.

it is undear wither most firms b«ieiked frmn th^e incentives. Howevo-. Ttaes on Capital I first amsider the argument that the dual measures of die return to capital are biased since they do not incorpcHate changes in taxes on cai^ital income. If taxes <»i cental have steadily di«i die shaie of revenues from capitsd taxation ^oidd also have fallen. A. llie two most s^ous potential proUeras widt the dual estiEOJrtes are ^at ^ y do afA incmporate chsmges in taxes associated with ciqntal aani that ^ y do IKM accoara fen: implicit subadies to pAvate investment fnovided by peiMc investm»it expendtones. Huff (1999). the diare of oxporate taxes in \xAai tax revenues rose from 26 pocent to 48 perceat whik die ctmiUned ^uure of ccspontfe and [Koperty taxes in t c ^ tax revenues increased fiom 58 percent to 64 percent (see Figure 3). siK« die niOional accowits imficate that the capitat-oi^wt ratio has increased s h a j ^ .. the diree measures of the rental rate indicate no such trend. Therefore. G. thtf is. die rental rate based on the nominal lending rate will be a biased estimate of die marginal i»txluct of capital. while &ie Singapoirean national accoants indicate tfiat the marginal product of capital has fallen sharply. and a plethtHtt of other tax incentives over the last two or three deciutes.VOL 92 NO. Ttu last potential problem is that n(»9inal lem&ng rates in Sings^xMe were regulated by a bank cartel until die 197O's. dte effective tax on cq>ital in Sing^pwe may have fallen since die 196O's. 1& fsMESst. This section assesses these arguments and ultimately concludes that they do not explain die large discrepancy between the rental rates used in the dual analysis and the return to capital implied by the national accounts in Singapore. Young (1998) and idtm F. Oat way to check whedier the tax rate on aggregate c ^ t a l has falloi is to lotd^ at aggregate ditta on the sources of tax revenues in . these estimates oi the retum lo capital are backed out of the national accounts. While die average pK»ptstty tax has fallen. As previously dismissed. Tax infor most fmcign fiims are negotiated widi each fiim by the Singi^xwean goverma^ <and details oi each agieonait are not released to the public). these rates are simply not relevant ffx raaay fiiaos m Sing^Kire. In^ead. Ermisch and W. Therefcae. whUe it is true dot tax iiKentives hiwe aipfaaB&nB^ become lacHe gmonus over die last f&M decades. the return to ca{rital in^died by the national accounts must have fallen by die same amount. 3 HSIEH: THE INDUSTRIAL REVOUJTION IN EAST ASIA 513 market measures of the retum to capital are craiHstent widt &e Korean national accounts— eveiy es&mie oi the rental rate shows that pcodact of eiqfHtal in Korea has p l ^ h k v o y dh^rply. die average ccnporate tax ntte has mcae than doubled since the 196O's. AnotJier potential {Hx^lem is diat Ihere may have been a laige risk ^«mimi in Singt^cHC in die lirie 196O's and ealy 197O's dutt are not ci^miied by the estimittes of die rental rate. the maiket meaaans of the rental rate m Wcm^ Ke»ig and Taiwan are also hroadly cos&Meot with the .^' The large gap hetween the dual and primal estimates of TFPG for Singapore is due to this inconsistency between the national accounts a»l the estimates of the rental rate. This evidence is not condu^ve since the marginal tax rate can diff»' frran the avei^e tax rate (e. AQT aie obtained by dividing die pajrments to c^»al in B^cmal income by an estimate of the cental stock cosofOiiBi fiom data on investment expenditwes foxn the nabonid accdBib. In c^er words. die share of ccHporate taxes increased from 2 percent in 1966 to 5 percent by 1990. the o ^ a l qiK^ion is whetter the tax rate on aggregeae dental has fallen over the last few decades. while the maxinuan tax rate on cai^ixal has fallen over the last few decades. . Mmiy observers have argued that due to a gri^ual fall in the corporate tax rate. Fn»n 1966 to 1990. die aggregate tax ditta in^cates Aat the share of revoMKSfrimitaxes <» ci^tal has incre^ed.^ However. if new investment is treated differ- ^'Young (1998) points out that die publication The Singapore Economy: New DirectUm (1986.g. increases in d^i«ciittion alkwances. S i a a l i ^ . This section considers four reasons for wh^ the estimates of Ae rental rate of c i ^ t d used in die dual estimates may not be good estio^tes of the marginal {mxhict of capital in Smg^xxe. Chut 2-7) presents ^timates of the return to oqrital supplied by Singapore's Dq>arttn«it of Statistics diat ai^iear to indicate tbat the marginal pnxluct of capital has falloi since the eariy 197O's. As a fractlcm ci GDP. ^ See for example.

In support of tbis bypotbesis. tbe govemment also borrows extensively from tbe Central Provident Fund (CPF).4 • 0./. capital is given by Pi . 0.5 0. currently at 40 percent of the employee's income divided evenly between the employee and the employer. wbicb is required to bold tbe majority of its assets in tbe form of govemment securities. wbicb increased from 3. in addition to its budget surpluses. Tbe CPF. B. the marginal tax rate on type. 0. CAPITAL T A X REVE>4UES/TOTAL IXCO. participants are allowed to use their fund balances to purchase housing or shares in certain govemment companies. Tbis section presents evidence to show that although the govemment controls a large share of national savings. it does not follow tbat IP^BLIC niust be large -^PRIVATE I PUBLIC " Specifically.3 • 0. along witb tbe govemment's budget surpluses. form a large pool of savings tbe govemment could bave potentially used for public investment projects. (the variables are denned in footnote 14).8 • 0. - l l + *. Tbis is familiar savings-investment identity.ME T. if depreciation allowances. private investment may bave been implicitly subsidized by tbe large amount of public investment spending. First.PUBLIC ^ CA.^^ Tbe CPF bas become one of tbe most important vebicles for private sector savings. According to tbis argument. and tbe current account are decomposed into tbeir private and public components. In reviewing tbis evidence.x rate differ between new investment and assets which have already been invested. but otherwise are not pemiitted to withdraw their balances. tbe fact tbat tbe average tax rate on aggregate capital bas increased significantly since tbe late 196O's makes it more unlikely tbat tbe marginal tax rate on capital bas fallen by enougb to explain tbe discrepancy between tbe return to capital implied by the national accounts and the marketbased measures of tbe retum to capital. tbe retum to private investment may not bave fallen tbanks to tbese subsidies. COMPOSITION OF N. investment tax credits. accounting for 11 percent of GDP at its peak in 1985 (see Figure 4).\ -\ +b off-budget government corporations and statutory boards also earn large profits. investment. First.2 1966 THE AMERICAN ECONOMIC REVIEW JUNE 2002 Corporate and .A. this can drive a wedge between marginal and average tax rates.6 percent of GDP in 1968 to about 20 percent of GDP by tbe 198O's (see Figure 4).X ently from existing capital). except tbat savings. and bave not been channeled into public investment.. Therefore. a large number of . the central govemment runs large surpluses of current expenditures over current revenue.^L SA\TNGS IN SINGAPORE FiGiTiE 3. Tbis identity makes it clear tbat even if Spugj^i^ is large. tbese funds bave largely been used to build up large boldings of foreign assets. Property Taxes f A 1969 1972 1975 1978 1981 i984 1987 1990 i968 i970 1972 1974 1976 197S 1980 1982 1984 FIGURE 4. It is funded by payroll tax. Before they retire or leave the country.^' Second.9 0. or the corporate ta.6 H. Second. tbe government runs large budget surpluses. p U\Z -.. it's useful to bave tbe following accounting identity in mind: (9) S.ATION.514 0. Stalinist Forced Investment Wbile tbe tax rate on capital appears to bave increased over tbe last few decades. "-The CPF is Singapore's social security system.^' However. Young (1992) points to tbe large sbare of national savings under tbe control of tbe govemment. but tbe retum to aggregate capital bas fallen due to a decline in tbe retum to public capital. '" These budget surpluses come from two sources.

roughly twice die size of SingapcM-e's GDP that ^' national accouols provides estimates of the so-ciOed rndtgemus GHP and GDP. debt To anive at In sum. These last two assumptions are ratlier ctHnervative and dius impart a downward bias to the estimated stock of foreign assets. and has not used Aem to finance public investnwnt projects. amounting to rmighly 14 percent of GDP in 1990. ^ This (fata is ctminled by the Report on the Census of Industrial Production. CcMPOsmoN <x INVESTMENT SPENNNGIN SINGAPORE because the government can invest the savings under its control in other types of assets. and investment spending is pruoarily pivate investment. die Singaporean government has accumulated large holdings of foreign assets with Ihese resources. . it does provide estimittes of d^ share of incoim SKxruing to foreign nmitm^s from which we can estimate the share of foreign ciq>ital in Singi^re's capital stock. In die manufacfiuing sector.^** As for aggregate invesdiKnt. 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA 515 1966 1969 1972 197S 1978 19S1 19M 19«7 1990 1993 FIGURE 5. but we csDi obtain a rough estimate of die govenunent's earnings from these assets from odier data in the national acc(Nints (Figure 5).VOL 92 NO.^' In 1980. Tterefoie. Siace foreignos play such a lioge role in Sing^Kxe's economy. In timi. nc^ public investment (see Hguie 6). " The incotne accruing to foreign nationals is the difference between GDP and so-called "indigenous" GDP. The Yearbook ofSuaistics Smgapore stepped puldidiii% a seties on the in<3ease in the public sectw's fmeign assets in 1982. The government does not {Hovide die public widi any information about its hohtings of foreign assets. However. is Ae GM* n d (XM> cone^oiKlii^ to poieMi nMionaU. fcseign investn^nt accounted for an avers^e 79 percent of total investtnent between 1972 imd 1989. PAYMHHS TO F<»EK») CAPITAL IN SINGAPORE AND TO SINGAPORE'S FOREIGN ASSETS 1968 1971 1974 1977 1980 19«3 1986 1989 1992 FIGURE 6. since IpRivATE is nwjch laifCT dum Spjj/vAra. A conservative estimate is that Singapme's public sectcM-'s foreiga assets were worth 83 billion US dollars in 1991. at least until the early 199O's when die private sectcff in Siiu^Kxe stHted to invest abroad. paynunts to f(»eig^i5 (bc^ labor and cf^tal) averaged 29.1 p«cent of GDP (see* Figure 5).1 assume diat the wraai accumilati(» of feteign assets is die sum of the operating svsplus of the coostriidated puUic sector (coitnl govamnett md statutory boards) and the increase in dcnnestk. Although dus measure also itidHdes die wage earnings of ISi^apcneans liOioaA and the eanings <n fi»e^ ass^s held 1^ die phvtte sector in Sl^i^Mxe. afia 1982.''* Assum- the USS 83 billion estimate. The Singaporean govamB«t c«Bie vf> with Aese meuoies in the etriy 197O's to prasoade die IMF to continHe to classify ^^qmre as a (tev^qring country.^^ As can be seen. I also assume that Singapwe held no foreign assets in 1966 and thitt after 1966. ^" The estimate of w ^ e income of foreigners takes the estimate of total wage payments to fcxeigners from the 1980 cotRis and scales the resulting estimate to account fotself-employed woikers. while SPUBLIC is large in Singapore. the rate of retum on Singapme's fcHeign assets was the average retivn on long-term govemn^nt bonds in tte six largest iiKhistrialized cmmtries. CApuBi_ic is large as well. The estimiOed earnings of the government fnmi its foreign assets is calculated as &>e diffeietice between indigenous GNP and imfigenous GDP. From 1980 to 1993. paymoits to foreign labw accounted for onesixth of total payments to foreigners. Sing^irae's {mblished national accounts does not jsovide a breakdown between investment by foreigners and by Sing^wrean nationals. private investmeiM has been financed by large inftiws of fraeign capital. these are probaUy ^ule small. indigenous GNP and CSSf are significantly lower than GNP and GDP. die earnings from these foreign assets are large. which ^eiddi^. In fact. lsogely in the fcnm of direct foreign investment by multinationals. " t U s calctdtticn uses the pid>M^ied e^imates of die increase in piMic sector foreign assets h^oie 1982.

9g3 is the retum to capital in 1968.: the hypothetical private capital share in 1990 can be expressed as / ^FRiVATE.2 percentage points a year (see Figure 2 and Table 1).516 THE AMERICAN ECONOMIC REVIEW- JUNE 2002 ing tbat tbe sbare of payments to labor in total payments to foreigners remained constant. In addition. one of tbe measures I use to estimate tbe marginal product of capital in Singapore is based on the data on the retum to equity from the Singapore Registry of Companies. as previously mentioned. A simple way to assess tbe magnitude of tbe required subsidies is to ask tbe following question: if we believe tbat tbe retum to private capital in Singapore bas remained uncbanged since tbe 196O's and tbat tbe figures on private investment provided by Singapore's national accounts are accurate. tbe rate of dual TFPG calculated from tbis estimate still exceed tbe primal estimate by 2. which is roughly one-half of total payments to capital and 70 percent of payments to private capital. In sum. While it is tme tbat tbe retum to equit>' yields a negative growth rate of the rental rate. Anotber way to measure tbe risk premium in Singapore is to look at tbe interest rate paid on US-dollar denominated bonds issued by tbe Singaporean govemment in tbe early 197O's. tbis suggests tbat tbe risk premium in Singapore bas not cbanged significantly since tbe early 197O's. it can give us an idea of tbe magnitude of tbe private risk premium in Singapore since tbe two measures are typically bigbly correlated in developing countries. 1990 = '•|96s^p«/v.. Althougb tbis interest rate provides a measure of tbe sovereign risk premium in Singapore and not tbe private risk premium. tbe payments to private capital would bave reacbed 90 percent of GDP by 1990. In tum. since a.= 2. and r. If tbere was a large risk premium in Singapore.its" I9>. C.i99o'^i99o where I^pRiVATE 1990 '^ the private capital stock in 1990 (computed from the national accounts). tbere would still not be enougb to pay tbe required subsidies.'RIVATE.!995-^ "A.7 = 0. •"' The hypothetical private capital share in 1990 is calculated as a j . payments to foreign capital accounted for an average 24. particularly foreign investors. tbe negative trend is not statistically significant. own the largest share of Singapore's capital stock. A simple way to gauge tbe importance of possible cbanges in tbe risk premium is to use a measure of the retum to capital tbat already incorporates a risk premium. including government-owned enterprises and subsidiaries of foreign companies.9). Tbe Singaporean govemment tapped intemational financial markets for tbe first time on '^ This calculation assumes that total payments to capital account for 50 percent of GDP. tbe necessar)' subsidy to private capital would exceed total payments to capital by 40 percent of GDP in 1990..1990 ~ "^. and payments to private capital account for 34 percent of GDP. Since tbe trend of tbe rental rate calculated from tbe retum to equity is not significantly different from tbat of tbe two otber measures of tbe rental rate. This registry compiles data from every incorporated business in Singapore. I''i99o is aggregate income.^igSil ~p JZ- 1990 \ I • X^^. wbat would the share of payments to private capital had to bave been by 1990? A simple back-oftbe-envelope calculation indicates that if the return to private capital has remained constant since 1968."*° Since tbe sbare of total payments to capital (including public capital) bas remained rougbly constant at 50 percent of GDP.^^ Since private investors. tbe subsidies required to prevent a fall in tbe return to private investors are simply enormous if tbe data on Singapore's stock of private capital is to be believed. In fact. tbis sbould appear in this measure of the retum to capital.4r£.i' With an initial share of private capital (in 1968) of one-third and . even if tbe entire public capital stock were used to subsidize private capital. Changes in the Risk Premium I next consider tbe possibility tbat tbere was a large risk premium in Singapore in tbe late 196O's and early 197O's that bas subsequently fallen.1 percent of GDP from 1980 to 1993.7 this yields a hypothetical share of payments to private capital in 1990 of 90 percent (W x 2. .

However. The truth of the matter is diat wMe the bank cartel set ceilings on deposit rates." Hu^cs to these subsidies. this time with a face value of 20 million US$ and a 15-year maturity at a 7. Treasury biUs of similar maturity. len^ng "' This calcui^on is based on the average gap in 1987 and 1%8 betwem the yields of long-term bonds rated AA+ and Aa3 and that of U.ait fall.8 percent higher than the minimum loan rate in 1966 (p. In the late 198O's. this inq>lies diat Ae estiaates of (bial TFPG ]veseated in dus p^)er are upwardly biased by 0. Hierefore. Treasury hiUs are from various issues of An Analytical Record of Yields and Yield Spreads by SalcMnon Brodiers. the narrowing of this gap was probably due to the housing loan subsidies [ffovided by the Post (Mice Savings BosH-d (POSB) in die 1970's. the esdmated rratal rate of capital based on the Lee (1974) for aiklitional details on die cartd's interest rate relations.12 percent a year. Therefore. •" See Dudley Luckett et al.S.VOL 92 NO. which v/eie not subject to the cartel's reguladons. 174) states diat die POSB esUiUished a si^sidiiffy in 1974 specificidly to "extend housing loans to depo»tors at uilerest rstfes lower than the prevailing maiket rates. and tbe yiel& on crapciate bonds and U. the end of the bank cartel in the 1970's could have masked die fall in the marginal product of capital. the government issued US-dollar denominated bonds again. 67). A pote^al iHoblem with the av»age lending rate is that these rates wereregulitfedby a bank cartel until die cartel was disbanded in die early ^^ According to this argument. and the average lending rate of commincial banks narrowed in the 197O's. In October 1972. . See Chapter 8 in rates were kept below their equilibrium levels in the late 196O's by ceilings on lending rates.S. ff the bank c^tel's mininnim lending rates {M%v«ited l»nks frmn offering lower rates to s<»ae of their customers. it set floors on lending rates. Over 20 years. Tlie cartel set mininuen lending rates fw (U^rent types of transacti<His but the baidra were allowed to charge higher rates.21 to 0. D.21-0.95-basis point diop in the rem^ r^e is equivalmt to a 4.23 pexceM lower dran wh^ ^ estimaies in this paper indicate. an 0. However.8S-0. *^ This ciatei (the Association of Baidcs in Midaysia and Singa{»re) w ^ finally dissolved in 1975. the cartel's objective was to increase die gi^ between lending and deposit r^es and dius maximize the profits of its members.23 percent per year.4 pracraM in 1975 to ova. the average lending rate for most small and medium-sized firms in Singapore was 2.7S-pen.75percent interest rate. p. which is relatively small. Financial Market Controls One of the measures I use to estimate the trend in the real intraest rate is the average lending rate of ccnnmeicial baidcs in Singqiore. Treasuiy lxmds of conq)arable maturity by an average of 195 basis points.'^^ In turn. which implies a soverdgn risk {semiiun (rf 100-110 baas points.'*' Afte all. FurthemKHe. The iitfcsmation on maturity atid yidds of tfie bends issued by the Sing^cremi govonment in the eariy 197O's is bom Chwee Huat Tan (1978)."*^ An 85-95basis poims <kc^ in the sovraeign ri^ {xemium over two dec^es implies diat the average annual growdi rxtte of therentalprice oi coital is 0. the average l^iding rate should have fallen to its equilibrium level. Young (1998) shows that the g£^ between the lending rate (primarily for housing loans) of finance ccmqiames. this aigument is oidy valid if the cartel kept lending rates below their equilibrium tevels.2S-4. (1994. with a capital share oi 50 percent. if the cartel's craitrols on lending rates had any efiect. Tan (1978 p.5-percent interest rate.11-0. Singi^xire's long-term sovereign foreign currency (tebt was rated Aa3 by Moody's and AA+ by Standard and Poors.S. Afto: die cartel was dismanded in the 1970'5. 168).27 percent in 1986. the POSB's share of d» housing loan maiket increiffiedfrcMn5. this translates into an average decliiK of 0. *. the average lending rate in die late 196O's would have been higher than their market-clearing rates. "^ If the average rental rate of coital is 20 percent (assuming a real interest rate of 8 percent and a depreciation rate of 12 pat:ent). 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA 517 December 1971 by issuing bonds with a face value of 10 million US$ with a 10-year maturity at a 8. after these ccntrols were lifted in the 197O's. In support of diis argument. The interest rate paid by the Sing^xnrean government on its first two issues of US-dollar denominated homis exceeded tte interest rate on U. the ratings on Singapore's sovereign loBg-tmn debt in die late l < ^ ' s are from Bkxndierg's database. l^gely at the expense of the finance companies. lending rates rose to their equilibrium levels.Accrading to data collected by Lee (1974).

j Singapore Hong Kong aoo I I ! r I 1 I I r I I I 1966 19681970 19721974 19761978 198019B2 1984 19861988 19901982 FIGURE 7. While one can raise objections to any individual estimate of dual TFPG presented in this paper. not understate. official estimates of the value of residential housing do not depend as much on estimates of imputed rent because only 45 percent of Hong Kong's population live in owneroccupied housing.*** Public •" I am grateful to Soon Teck-Wong. it's worth remembering that the other two measures of the return to capital (earnings-price ratio and the return to equity) that are unaffected by the banking cartel yield results that are broadly similar to that obtained from the average lending rate of commercial banks. a Hong Kong government report estimates that 38 percent of Hong Kong's population live in inadequate housing. they account for 10 to 11 percent of GDP in Hong Kong (see Figure 7). Hong Kong . this has a significant effect on the national accounts.12 0. •** inadequate housing is defined as "temporary structures. For comparison. the rental rates of public rental housing are highly subsidized. Since over 90 percent of Singapore's population live in owner-occupied housing. In Hong Kong. they also indicate that Singapore has invested significantly more resources (8 to 10 percent of GDP) into housing than Hong Kong (about 4 percent of GDP) (see Figure 8).*® The more general point is that there are idiosyncrasies in how every government compiles their national accounts that make cross-countr\' comparisons problematic.10 THE AMERICAN ECONOMIC REVIEW JUNE 2002 '. this. This translates into large differences in the average quality of housing between Hong Kong and Singapore. why hasn't the rental rate fallen as it has in Korea? The natural explanation for this discrepancy is that Singapore's national accounts have overstated the amount of investment spending. consider the way the statistical authorities in Singapore estimate the rental value of owneroccupied housing.^ »-. PRIVATE CONSUMPTION EXPENDFTU-RES ON H O U S I N G / G D P 1966196819701S7219741976197819801SBZ19M1986ISBB1SG0 ISSe 8. the Director of the National Accounts Section of Singapore's Department of Statistics. As an example of See Swee and Linda Low 11996).14 0. for bringing the treatment of imputed rent in Singapore to my attention. the fall in the marginal product of capital. one of the founders of modem Singapore and the main architect of its economic policies. However."*^ The Singaporean statistical authorities assume that the rental price of owneroccupied housing is the rental price of public rental housing.518 0. Goh-Keng Swee. has suggested that investment expenditures in Singapore are overstated. Finally. In fact. As late as 1987. it is difficult to see how all three estimates of the rental rate in Singapore could have remained constant over the last few decades if in fact the marginal product of capital has fallen sharply. while private consumption expenditures on housing in Singapore account for roughly 5 percent of GDP. RESIDENTML HOUSING L W E S T M E N T / G D P average lending rate would overstate." "overcrowding by tenants sharing housing units in . Errors in the National Accounts What we are left with then are two sets of estimates of TFPG for Singapore that are difficult to reconcile. If the capital-output ratio has increased in Singap)ore by the extent implied by its national accounts. While official statistics indicate that the rental value of residential housing in Singapore is much lower than in Hong Kong. V.

but the gap between the two cities widened std>sequemly. the treatmoit of owner-occi^ed housing in SingiqxH« is i l l v ^ ^ v e of die potential i»tfalls one faces when using national accounts di^.resideiKijdhousing spasx pat pasea was ^^?oxinurtely the same in bodi couatries in 1968.VOL." and "[wblic housing with structural problems. and all of the increase in of Uviag has been due to factor accupriffiffiily cajHlal accumuliMirai. M 1 9 ^ .7 to 50 sqmas met^s per occi^ott. the Isffge discrqiancy between tte dual and {simal estimates of TFPG ia Sii^ap<»e suggests dtat we shoidd be very cautious about the d^rta from the Siagaporesm a^cmid »x(»mts and the growth accouatiag exercises diat rely on this data. '"The ^ock (rf lesidoitial housing is calculated by a staoflud perpetual inv^toi> sf>proach &om annual estim»M of te total area of completed residential housing. whoeas the estimates by Tsao and Wong and Gan are based on twod i ^ industry-level data.Yeh (1985. RESIDENtlAL HOUSING SPACE PER PERSON g in Singi^xH% is much lietter than in ^ Koag. the dual TI7G estimates are r^narkably similar to ibs primal e^imates. See the i<^)p«£x for fiirUier details. the dual approach has die adt^onal advaats^ of usiag data oa {»iees mstead of qpiaatities. In the case of Korea. public housing in Haag Kong {sovided between 2. Young's estimties are appetetttiy based on aggregate data for the manufacturing sectcn-. a numbo* of tenuous f^sun^tions and estimates have to be made in order to constmct the d i ^ oa quaadties of ouqwt and c£q>ital needed for a primal growth sK^ouatiag exercise. However.7 square meftras per perscm. is for Smgi^xoe. . p. '' the n r gRtwA rates for die mMiufactuhng sectra. In Siag^x>re.7 percent a year f(n: fhs aggregate '^ Tlie d^erem^ betw«n the rate of TFPG in the manufacturing sector and the segregate eccMKHny is ralfaa large. By 1980.'° Oae way to assess the impoitance of die treattoeiK of owno'-occupied housii^ in Singapore is to kx^ at die difEeren^e betwran die r^e (tf ifTG in the {^regtie eccmomy aiKl in the man^EKAimiig sector in whidi the undervaluation of te^denAsl lutosing is nM an issue. Nonetheless. The estimates tor the iqjgregate economy are fnnn Young (1995)." See Table 2. Given tl^ enormous difficulties faced in coastnictaig reliable aatic^d accoraM anl ci^tal stock d^a. die evidence suggests that the retum to capital has increased in I»iv^e hcNising. 92 NO. aiMi may be due to oth^ factors in addition to tl^ imdervaluation of residentbl Irausing. due foi redevelc^nnent.2 sqHare mettts is about die aiea of a coffin. Young's estimates of ITPG f<v the manufocturing sectw are lower than the estimttes from Tsao (1985) and Wong and Gan (1994). '*'This estimate is fixnn Aline Wong and Stqte'. (1990). At a minimum. p.4.flieaverage rate of (faimal) TR»G was 0. standard ^tim^es ctf primal TFPG suggest that there has beoi no techacdogical {HOgress over tbe last 30 yetas. then dieretmnto c^itfd should have f:^l»i draauttically.84 p«cent a year in the manufactraiBg sectot aM -0.for the 198O's are fiom Fat-Chyi Wong and Wee-Beng Gan (1994) and Yum Tsao (1985) for die 197O's. 5Q2). Hie advantage of usii^ d» dual is diat factat prices. Castdls et al. the dual aiqnoach provides a way to bring alternative data to bear to check the consistency of data from a country's natioaal accouate.'*^ Takii^ both piridic and {nivate hoasag into acccwnt. Ia contrast.2 to 5. 16 in M. 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA 519 — — -' " Hong Kong BtXJKE 9 . Where the d ^ saai primal estimates differ. Fn»En c 197© to 1990. This paper has shown how the dual exercise can be a nscM (xm^^ecBem to standard i»imal growth accoiHMiag oiOKises. 2. VI. are observed as an equilibrium outcome in a maiketplace. I»imarily wages and iMerest rates. Yet. aad dram^cally so. If this story is ccalect. SingapcHe's housing stock per pasaa was roughly doubte that of Hong Kong wd diree tiims that of Hong KMig by 19W (see Figure 9). white (Hitriic housing in Singi^we provided b^weoi 7. Since die task of learning the intricacies of national income accoun^^ for every country is prohibitively time consuming.

the area of new housing does not include the area of kitchens. the money market rate are compiled from various issues of the publication Hong Kong Monthly Digest of Statistics (1977 to 1981 from p. and nominal and constant investment in capital goods starting in 1961. along with data showing an increase in real wages over the last 30 years. pp.wws. 746-747 in the 1977 issue. .520 THE . To initialize the series. and the housing society. 1973 to 1976 from p. pp. The best lending rate of the Hong Kong and Shanghai Bank after 1971 and the money market rate after 1982 are unpublished data provided by the Hong Kong Census and Statistics Department ((http://www. 37 in the January 1977 issue. I calculate the cost per square meter of private housing (excluding the developer's profit) and assume that the cost of a given square meter of public housing is one-third that of private housing. The data for the best lending rate for 1966 and 1967 is from Hong Kong Statistics. 4 6 8 469 in the 1969 issue. 537 in the 1971 issue. The dividend yield and the earningsprice ratio of stocks included in the Hang Seng index were provided by the Hang Seng Bank (http://www. 500. Data on wages by sex and education for 1981. To estimate the area provided by new public housing not included in the published figures. Korea: Wages by sex and education for 1969-1991 are compiled from several issues of the Report on the Occupational Wage Survey (pp. pp. p. pp. 522-523 in the 1976 issue. namely the resettlement estates. and the home-ownership scheme. 400600. and 1991 are the author's tabulations from the 1-percent sample of the Hong Kong Censuses of 1981 and 1991 and the Hong Kong By-Census of 1986. 44 in the January 1973 issue. I also make the following adjustments to the annual estimates of new residential housing. rental value of residential housing. Table 215. and hallways). 620-621 in the 1979 issue. The dual estimates of TFPG uses this evidence.edu/~chsieh/ hangseng. I take the estimated total area of residential housing from the 1971 Census. housing authority buildings. For previous years. This adjustment roughly doubles the estimated area of new residential housing each year. 1986. and 750 respectively. The published tables of the 1966 Hong Kong By-Census (Report of the ByCensus 1966. 219 in the 1981 issue. 41). Second. 44 in the January 1970 issue). APPENDIX: DATA SOURCES Hong Kong: Estimates of Gross Domestie Produet (1996) provide data on GDP defiators.edu/ ~chsieh/hkblr. First. 199-201) provide data on the number of people by sex and education in three income ranges (below 400. p. and hallways. 410-411 in the 1972 issue. To make the figures for Hong Kong comparable to that of Singapore (which does include the space occupied by kitchens. 64 in the March 1983 issue. pp. Basic Tables (Table 17. to obtain estimates of TFPG which suggest that technological progress has played as important a role in Singapore's growth as that in the other East Asian countries. I estimated average wage by sex and education by assuming that the average wage for each income range was 2(X).pdf). 265 in the 1984-1989 issues. p. and 1966 to 1968 from p. The quantity of residential housing is calculated by a standard perpetual inventory approach from the annual estimates of the area of completed residential housing (from the annual issues of the Hong Kong Annual Digest of Statistics).AMERICAN ECONOMIC REVIEW JUNE 2002 Singapore. I add 50 percent to the area of new residential housing in Hong Kong. 314-315 in the 1973 issue.pdf)). 628-629 in the 1974 issue. 1969 to 1972 from p. pp. It does however include the area of new public housing provided under the private sector participation scheme. bathrooms. pp. middle-income housing program. 1947-1967 (p. 153) and from 1968-1970 from the July 1972 issue of the Hong Kong Monthly Digest of Statistics (p. bathrooms. The 1976 wage data is from the published tables in the publication Hong Kong By-Census 1976. above 6(X) Hong Kong dollars per month).princeton.wws. p. I multiply this cost per square meter by the expenditures on public housing investment from die national accounts to estimate the area provided by new public housing.princeton. p. 740-741 in the 1978 issue. the figures for the area of new residential housing in Hong Kong does not include certain types of public housing. 44). pp.

a airvey by the Bank of K(H«i in 1967 (Report on the OcciqKitional Wage Survey. w d data &om 1983 to 1993 are from T ^ ^ 22 aad 23. p.VOL. The bk 8.wws. Tlie average bradoets. 171). 1^3 ftwn Tables 45-46. All subseqiMM e^imates on wages by sex and eduaOion (exce|K 1980 md 1990) are from tte annual isaies of die Report on the LeAour Force Survey. ace cakvlated from die annual issues of the Korea StiOistical Yearbook. 1984 ftom T^les 45-46. Prior to 1969. 1973 and has been con&K^ed usually ever . p. tlK data from the 1973 issue of Ae Report on the Labour Force Survey are frran TaWe 18. The interest rate oa secured lows and dK cme-year time (^)osit noe are ftom the aaaa^ issws of Ae Eamomic Statistics Yearbook (tbta from 1962-1969 are 6om TaUes 244 aad 247. 143-144 in Smge^fm-e Census of Po^daticn. 232). 1978 ftom T^des 54-55. 156). 1985 ftom Tabtes 38-39. ^xc^odly. Ramdkrislman (1980) olttamed ^eftom 1980 to 1989 ia a 1992 wcoking i^>«: vi(wsly m^uUished data on the number of (Efficiency of Singapore Om^xeUes: A Study of woifcns by sex ami educttcm in diffoent inReturns toAssH Ratios). Data on wages include special payments and monthly equivalent of annual bemuses. 1974 from Tables 54-55.edu/~chsieh/datastream. K. 1966) 6oes not have any ditta on income by k weaker chuacteristics. 255 in the 1991 isaie). pp. 1979 from Tables 54-55. The ctoa in 1980 and 1990 ace ftcm die of de Pt^xdftdcm Coisuses conin dnse two yefos (JaiAs 11. 170). Volume 4: Economk Chmicteristics and Table 41. 1987 frcm Tal^ 37. data from 1970-1^6 are ftomTd>les 179 ^ i 181. p. Labour Frace Survey was first conAicted in IH:nK:eton. 312 and 3l4inthe 1977 issia. p. the B13 imd B14. I use the t ^ e s {»esent»l in dieir book ftom 1968 to 1990 me ftran die Yearbo<A of to (4]«yn e^im^es of av«age wages (Tables Statistics Singq^e. diOa ftom 1977 to 1982 a» frran Tdjies a ) and 22.14. 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA 521 269 in tlK 1990 issue. Specifically. Sinre dieir t ^ ^ s cmly lendiag rate and Ae pome lemUi^ nOeftom1968 presents the naadin of wcfkos in each income to 1977 areftrand e 1977/1978 isue trf die Yearrange. Real and nominal expenditures on investment goods. ami ftom 1982 to 1990ftx>mdie mid|}oiitt b^ween the lower imd uppa wage 1992 issue (Table 12. TlK E-P r«io is ftom DatastrefflB (series TOTMKSG. 190).xls)). 46 in Census of Pt^ndtaim. 50-51) jHovides data on wages by sex SIKI education in tte manu&cturing and mining industries. but V. 1976 frcMn Tables 54-55. p. 19% from TaUe 39. <htq)://www. Bhaaoji Rao of Statistics puUidted this data and M. 353) ^ld Sung-Tae Ro (1994. Tal^ 2.2. p. 1977 ftom Tables 54-55. 383 and 384 in die 1994 mujti). as well as the GDP deflates. 19K ftwn TiWes 39-40. The next survey was un&rtaken in leffiyog rate prior to 1968 used to conqmte the retan to cajntal shown in Figure 2 is the k>an 1972 {Report on the Household Expenditure r^e of commncial banks frtnn Lee (1974 TaSurvey 1972/1973) from w*ich die 1972 estimates of ws^es are obtained (TtAAe 7. 1980. I assume tii^ wi^es in die tap two inbook of StiOistics (T*le 11. The earliest soiKce of wi^e data by sex and The rensn to eqwty ftom Sin^x»e's RegeAicatkm is itom die 1966 Sampte H(»isehold istry of Coiiq»uiies were provided by SmgaSur>«y. I wi^es in die two top incrane f<Acw a Pareto diArax^mi and diat die Singapore: in die odi» imxHoe groups is die knver smd vippa wage Isackets.8. p. iq>. l i e average l o K ^ rate Cdse rashes tmm die 1966 Sanqile Household from 1 9 ^ va 1980 £md the prmoe kncfing ntte Survey. and p. from come g r o i ^ ftdlow a Pareto distrilNtfii» aad 1978 to 1981 ftom die 1983/1984 issue (TaUe averse wage in Ae otha grcnqis is singly Ae 11. The animal Lab v T Force SiBveys ody provkle data cm die nunoH bo.d wofkeis 1^ sex and educatitm in diffoeitt To ^imate avraage wages. 1990: Ecanmmc Characterises). Singapore. 92 NO. lbs (rffickd piddicitti(Mis from diis surp(»e's Departanent of StsMtstics vey (Singepore Sample Household Survey. f^. Lastly. pp.13. 1982 ftom Tables 42-43.K>. p. 6). p. V. 1981 ftran Td»les 32-33. die cuib nuofcet loan r^e is from ColMiB eid Won-Am P»k (1989. 330 md 332 in die 1983 issm. aod 1989 ftom Table 36. 1975 &om TAtes 54-55. since dien (widi the excq^on of 1980 and 1990). p. 104). 3 ^ md 371 in die 1976 issue of the Economic Statistics YeaHjook.

534-537 in 1980. residential housing investment. The estimates of wages by education from 1972-1976 and from 1988-1990 are from the published tables of the Report on the Sun-ey of Personal Income Distribution (Table 29. Lastly. 358-360 in 1977. Supp. the published estimates of the central government's current expenditures do not include debt service pajinents after 1985. the estimates of the growth rate of real wages from 1966 to 1972 are from the 1966 household survey and from the 1972 survey by the Ministry of Education. 148-151 in 1987). Table 25. pp. pp. Table 26. pp. Fei et al.27. Current and operational surpluses of the central government and statutory boards from 1967 to 1973 are from Low (1985) and from the annual issues of the Economic Survey of Singapore for subsequent years. 150-151 in the 1975 issue. In addition. For the figures presented in this paper. the annual issues of the Economic Surwy of Singapore do not break down expenditures of the statutory boards into current and investment expenditures. pp. Supp. To obtain estimates of the residential value of housing after 1972. 480-483 in 1978. 152-155 in 1983.AMERICAN ECONOMIC REVIEW JUNE 2002 The GDP deflator is calculated from the Economic and Social Statistics Singapore. pp. However. Table 25. Annual net increases in the CPF balances and the public sector's domestic debt are from Economic and Social Statistics of Singapore 1960-1982 and the annual issues of the Yearbook of Statistics Singapore. and Table 90. pp. pp. Supp. pp. later issues only provide an aggregate estimate of private consumption on housing and utilities. Table 25. (1979) went back to the original tabulation sheets of the 1966 survey and estimated wages by sex and education (Table 4. Table 96. Table 28. 346-347 in the 1988 issue. 604-607 in the 1974 issue. Therefore. 1972 pp. The publication National Income in Taiwan . The housing stock is estimated by a perpetual inventory approach with annual estimates of the area of new residential housing from the Yearbook of Statistics Singapore. Supp. pp. Supp. pp. pp. 146-149 in 1984.). Table 29.522 THE . Supp. pp. Table 30. Table 25. 19601982 and annual issues of the Yearbook of Statistics Singapore. I assume that the share of investment spending in total expenditures by the stamtor>' boards from 1989 to 1991 is the same as the average fi-om 1984 to 1988. The only data on wage income for each worker by sex and education prior to the mid-1970's is from a survey conducted in 1972 by the Ministry of Education (Keith Gannicott. 312-313 in the 1990 issue) and from 1977 to 1987 from annual issues of the Statistical Abstract of the Republic of China (Supp. John C. pp. Table 25. 63 and 81). 452455 in the 1973 issue. pp. Table 10. 294-295 in the 1989 issue. I assume that the growth rate of new residential housing before 1963 (the first year the investment series is available) is the same as the growth rate from 1964 to 1969. The data from the 1%6 survey is not fully comparable to the data presented aJfter 1972 since the 1966 survey presents data on wage income of each worker. pp. pp. Nominal and real investment spending as well as the breakdown between private and public investment spending. The data on income tax revenues are irom the Annual Reports of the Inland Revenue Board. 514-517 in 1981. I assume that the share of rental value of housing in total expenditures on housing and utilities after 1972 is the same as the average share (slightly above two-thirds) from 1967 to 1972. 526-529 in 1979. The annual issues of the Yearbook of Statistics Singapore from 1967 to 1972 provides figures of private consumption expenditures on housing. To initialize the series. and private consumption expenditures on utilities and housing are from the annual issues of the Economic Sun. capital receipts are excluded from the estimated revenues of tiie central government after 1987 and of the statutory boards after 1986. 276-279 in 1982. Table 29. 176-179 in the 1976 issue. 222-223 in Fei et al. After 1988. Supp. This survey has been conducted since 1964.-ey of Singapore and Singapore National Accounts 1987. 452-455 in the 1972 issue. H. and Supp. I cannot adjust for this since I am unable to obtain estimates of capital receipts. I therefore add debt service payments to the published figures of cunent expenditures by the central government. but published tables on household income by educational attainment of the head of household are only available since 1972. pp. Table 26. and not on household income. Taiwan: The Report on the Survey of Personal Income Distribution contains data on household income by educational attainment. However. Table 28. Table 116. pp.

41 to 4.53 1.36 0.14 to 3.30 2. This djtta.63 to 3. the mterest mte on losms in informal nuok^s is a sinqde average d interest rates oa posK^ed checks in T a ^ .70 1.48 1.616 -2.29 to 1.52 to 1.703 0.511 Rental ]»ice of capital (ranges)" -0.63 DualTW (ranges)' 1.06 0.09 Wages 3.628 0. aad die (^-year tiaie deposit rate.69 to-0.67 3. TABLE A2—^RANGE OF DUAL TOTAL FACTCMI PRCHHJcnvirY Annual growth rate of: Country and real interest rate used Singapore Retum on equity (1971-1990) Average tending rtss (1968-1990) E-P raio (1973-1990) Taiwan Informal loan rate (1966-1990) Deposit rate (1966-1990) Secure loan rate (1966-1990) Treasury bill rate (1975-1990) Hong Kong Best lending rate (1966-1991) Ctf money rate (1966-1991) E-P ratio (1973-1991) Korea Curt market loan rate (1966-1990) Deposit rate (1966-1990) Discount rate (1966-1990) Labor share 0.70 to 2.38 2.22 -0.33 to 2.28 4.55 to -4.68 0.92 to -0.511 0.18 1.70 1.703 0.81 1.58 1.38 1.69 -0.75 3.18 0.60 -0. Kadisiuag.26 5.96 -4.739 0.13 to-1.79 to 3.04 4.40 to 3.VOL 92 NO.628 0.58 0.17 2.90 to-2. Al—COMPARISON OF GROWTH RATE OF "QUALITYADJUSTED" RENTAL PRICE OF C.21 to 4.24 3.28 5.30 2. The "simple" rental price is calculated as the real interest rate plus a ccmstant depteciaticm rate (8 percent).38 4.10 2.E" MEASURE OF RENTAL RUCE OF CAPITAL r'CJuality-adjusted" "Single' rented price rental {nice Korea (curb market loan rate) Singapcare (retum to equity) Taiwan (curb loan rate) Hong Kong (E-P ratio) -3.68 -5.99 to 0.14 1.04 2.38 4.43 to 1.67 1.70 Note: See text and notes of Table 1 for ai^tional details.96 3. TTie GES* d^alcw is also obcmied from d » same scHiioe. arefrcMnT^des 23 and 24 of die mtrndily issiKS of tie Financial Statistics Moruhly of die Central Bank of China from 1966 to 1991.20 -0.739 0.26 5.73 to 2.10 2. and Taichung.20 to-0.00 -1.56 to 2.33 2.20 Notes: The "quality-adjusted" rental price of cs^ital is the weighted average of the rental price of five c^^dtal goods. w h ^ the weights are the factor shares of each type of capital.511 0.746 -1.APTTAL AND "SIMFI.97 to 3.04 -0.50 -0.26 5.10 2. * 95-percent confidence intoval.739 0. .01 -5.05 -2. as well as tbe three-month treasury bond yield.95 -0. the interest rate cm short-term secured loans.703 -5.82 -3.69 to 2.24 1.58 to 2.64 to 0.04 4.66 0. Lastly.60 to-0.63 Primal TTP -0.28 4. 3 HSIEH: THE INDUSTRIAL REVOLUTION IN EAST ASIA 523 Area of the Republic of China provides data on c ^ t a l fonmdion ia cunmt and constant prices.45 -0.38 2.64 to 1.

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