1. Vu Pham Productivity Comparison and Convergence in East Asia Hak K. Pyo Professor Emeritus School of Economics, Seoul National University Hak K. Pyo Productivity Comparison and Convergence in East Asia The Third Asia KLEMS Conference Taipei, Taiwan August 12-13, 2015 Public Forum Total Factor Productivity Growth and Development of Service Industry in Asia August 13, 2015

2. Vu Pham 1. Introduction 2. Pattern of Productivity Convergence 3. Pattern of Labor Productivity in East Asia 4. Policy Implications for East Asian Economic Community Table of Contents Hak K. Pyo Productivity Comparison and Convergence in East Asia

3. Vu Pham 1. Global Financial Crisis of 2007-2008 2. Recovery based on Fiscal Expansion and Quantitative Easing (QE) 3. Convergence in Relative TFP Positions in East Asia (1980-2000) ICPA (International Comparison of Productivity in Asia) Project Jorgenson, Kuroda and Motohashi (2007) ed, Productivity in Asia 4. Pattern of Labor Productivity in East Asia 5. Policy Implication for East Asia 1. Introduction Hak K. Pyo Productivity Comparison and Convergence in East Asia

4. Vu Pham 2. Pattern of Productivity Convergence 1. Rapid Convergence in Relative TFP Positions by Korea, China and Taiwan to the US and Japanese level 2. Slight Divergence in Relative TFP Position of Japan from the U.S. level due to ”Two Lost Decades of Japan” (1991 - 2000) 3. The Relative TFP Position in U.S. Manufacturing was lower than that in Japanese Manufacturing during 1980 - 1995 but started a divergence becoming to be higher since 1995 Hak K. Pyo Productivity Comparison and Convergence in East Asia

5. Vu Pham Source) Figure 8.3 Changes in relative TFP positions for whole economy (Japan 1995=1) 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

6. Vu Pham Source) Figure 8.4 Changes in relative TFP positions for whole economy (Japan 1995=1) 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

7. Vu Pham 3. Pattern of Labor Productivity in East Asia: Convergence and Level Comparison 1. The Pattern of (PPP-adjusted) GDP per Capita($) during 2000 - 2001 after the Global Financial Crisis of 2007 - 2008 shows a similar pattern of continued convergence between Korea – China - Taiwan and Japan and a slight divergence between US and Japan. 2. The Pattern of Labor Productivity shows a divergence after 2005 with Japan surpassing the trend in Korea, China and Taiwan. Hak K. Pyo Productivity Comparison and Convergence in East Asia

8. Vu Pham 3. Pattern of Labor Productivity in East Asia: Convergence and Level Comparison 3. The Pattern of Labor Productivity in Manufacturing in Korea, Japan and China surpasses those in Services and Primary Sector. 4. Note that Japan’s and Korea’s labor productivity in Manufacturing has started to jump after 2009 and years of restructuring. 5. The Labor Productivity in Service Industry of Taiwan is much higher (and close to that in Manufacturing) relatively to the labor productivity in Service industry in Japan, Korea and China. It may be due to a more open service trade regime and less regulation in Taiwan than in Japan, Korea and China. Japan, Korea and China need structural reform and deregulation in their service sectors to improve on productivity. Hak K. Pyo Productivity Comparison and Convergence in East Asia

9. Vu Pham Source) http://www.indexmundi.com - Home > Charts > Historical Data Graphs 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

10. Vu Pham Source) KIP Database 2014 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

11. Vu Pham Source) JIP Database 2014 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

12. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Asia KLEMS China Data (Prof. Sun Lin) Asia KLEMS China Data by Professor Sun Lin does not provide the employment data of China (by sectors or total) that the labor productivity of China cannot be generated as labor productivity is calculated with output (Y) divided by Labor force (L). The China KLEM DB does not provide the absolute values or the index of K, L, E, M but the growth rate of K, L, E, M. It provides the growth rate of TFP (Total Factor Productivity) by two sectors (Manufacturing and Service).

13. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) Asia KLEMS China (Prof. Sun Lin) Gross output at current basic prices (in 100 million Yuan)

14. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) Asia KLEMS China (Prof. Sun Lin) TFP growth rate

15. Vu Pham 2. Pattern of Productivity Convergence China Labor Force (1,000 person) World Bank Data vs Wu, Yue, Zhang(2015) Data Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) World Bank, World Development Indicators YeartotalManufacturingServicePrimary 2000724,326284,095347,22793,003 2001731,360283,623352,30295,435 2002738,923274,006366,19498,723 2003746,320278,294377,50190,525 2004752,711291,617396,59964,496 2005758,613310,285409,36838,959 2006763,693330,377422,14811,168 2007768,074353,193426,995-12,113 2008770,992360,306439,785-29,099 2009773,686370,090453,960-50,364 2010774,172383,921462,846-72,595 Wu, Yue, Zhang(2015) YearTotalManufacturingServicePrimary 2000718,602158,326218,460341,817 2001727,796157,196232,164338,436 2002737,288154,564249,143333,582 2003744,715152,523264,924327,268 2004752,332156,023277,401318,907 2005759,666165,723285,648308,295 2006765,337177,359290,802297,176 2007770,834190,486293,831286,517 2008775,949200,157297,163278,629 2009780,787205,894303,693271,200 2010784,565213,072308,514262,979

16. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) World Bank, World Development Indicators Wu, Yue, Zhang(2015) China Labor Force (1,000 person) World Bank Data vs Wu, Yue, Zhang(2015) Data

17. Vu Pham 2. Pattern of Productivity Convergence China Labor Force Data From World Bank, World Development Indicators Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) World Bank, World Development Indicators

18. Vu Pham 2. Pattern of Productivity Convergence China Labor Force Data From Wu, Yue, Zhang(2015) Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) Wu, Yue, Zhang(2015)

19. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Chinese labor force data from ‘World Bank(WB), World Development Indicators’ have some flaws. 1. The primary labor force ( generated by Total Labor Force – (Manufacturing Labor Force + Service Labor Force) ) declines dramatically since 2004, which makes the productivity of primary sector be incredibly high during 2004 – 2006. 2. The sum of manufacturing and service labor force exceeds the total labor force during 2007 – 2011 that the productivity of primary sector during that period becomes negative.

20. Vu Pham 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia Source) Real GDP: World Bank(WB), Labor Force: World Bank(WB)

21. Vu Pham Source) Real GDP: World Bank(WB), Number of Employed Persons at Year-end by Three Strata of Industry: Wu, Yue, Zhang(2015) 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

22. Vu Pham Source) Asian Development Bank (ADB), Key Indicators for Asia and the Pacific 2014, www.adb.org/statistics 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

23. Vu Pham Source) [Korea] : KIP Database 2014 [Japan] : JIP Database 2014 [China] : World Bank, Wu, Yue, Zhang(2015) [Taiwan] Asian Development Bank (ADB) [Yearly Average Exchange Rates] : www.ozforex.com - Forex Tools > Historical Rates 2. Pattern of Productivity Convergence Hak K. Pyo Productivity Comparison and Convergence in East Asia

24. Vu Pham 1. Productivity Convergence in East Asia implies greater scope for economic integration. 2. The lesson from Greek incident in EU should be taken seriously : (1) FTA among China - Korea - Japan is desirable and should be promoted. (2) East Asian Monetary Fund to stabilize financial flows is desirable but not the East Asian (Common) Currency Arrangement. (3) FTA among China - Korea - Japan can encompass North Korea and Taiwan to promote security and political stability in East Asia. 4. Policy Implications for East Asian Economic Community Hak K. Pyo Productivity Comparison and Convergence in East Asia

25. Vu Pham 3. Wage-led Growth vs. Profit-led Growth. Wage-led Growth based on Kaldor-Verdoon Proposition, which stipulates wage-led GDP growth will promote growth of labor productivity. The Popular Regime of Wage-led Growth can fall into the fallacy (error) of composition provoking competitive depreciation because East Asia relies more heavily on intra-regional trade and investment. East Asia needs to promote profit-led growth based on innovation and efficiency from another round of creative destruction. This is the only way to avoid falling into long-term stagnation in the midst of aging and low fertility rate. The Promotion of FTA and continued structural reform and deregulation among East Asian nations can increase productivity in Service Sector and overall Efficiency of the region. 4. Policy Implications for East Asian Economic Community Hak K. Pyo Productivity Comparison and Convergence in East Asia

26. Vu Pham Appendix VAR Granger Causality - Korea Yearly Korea Output Korea Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia

27. Vu Pham VAR Granger Causality - Korea Quarterly Korea Output Korea Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia

28. Vu Pham VAR Granger Causality - Japan Yearly Japan Output Japan Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia

29. Vu Pham VAR Granger Causality – Japan Quarterly Japan Output Japan Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia

30. Vu Pham VAR Granger Causality – China Yearly China Output China Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia

31. Vu Pham VAR Granger Causality – Taiwan Yearly Taiwan Output Taiwan Productivity Granger Causes Hak K. Pyo Productivity Comparison and Convergence in East Asia