1. ASIA KLEMS
HSI 2017 July Tokyo, Japan
Estimates of Total Factor Productivity and Ex-post Rates of Return by Industries in Korea ( ) Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee*
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

2. Part 1: Sources of productivity growth in Korea
Introduction
Part 1: Sources of productivity growth in Korea
We examine the sources of aggregate productivity growth in Korea for the period of using Korea Industrial Productivity (KIP) database
The sources of productivity growth have shifted (1) from capital deepening to TFP growth (TFP-led growth) and (2) from manufacturing to non-manufacturing (industrial transformation)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

3. Part 2: Rate of returns estimates
Introduction
Part 2: Rate of returns estimates
We also estimate the ex-post rates of return by industries and compare it with ex-ante rate of return such as corporate bond rate.
Both estimates of rates of return have co-moved together since early 1980s and have shown a distinctive downward trend as the Korean economy moves from higher-growth regime to lower-growth regime due to industrial maturity and aging following up the Japanese experience of two lost decades.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

4. Part 1: Sources of Growth in Korea
Slowdown in real GDP growth rate since the mid-1990s
: 9.4%, , 5.2%, : 3.5%
Industrial transformation
GDP share of manufacturing has little changed since the 1990s, while GDP share of service has steadily increased until the mid-2000s.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

5. Slowdown in Economic Growth: Real GDP Growth Rate, 1981-2016
: 9.4%, , 5.2%, : 3.5%
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

6. Sectoral Transformation of the Korean Economy
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

7. Changing Industrial Sources of Productivity Growth
Following Stiroh (2002), we decompose aggregate (value-added) labor productivity (ALP) growth into
The sum of industry value-added LP growth
The sum of industry gross output productivity growth and material reallocation
(OR) Capital deepening, labor quality and TFP growth
Hours (labor) reallocation (toward more productive industries)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

8. Korea Industrial Productivity (KIP) DB
38 Industries (2 Agr-Min; 19 Mfg; 3 Utl-Con, 14 Ser)
Period:
2008 SNA and ISIC Rev. 4
Note: ASIA KLEMS
30 industries (ISIC Rev. 3)
Period: (4)
Countries: India, Japan, Korea, Taiwan
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

9. ALP Decomposition Using Industry Gross Output Productivity
ALP growth decomposition
Real value-added (Y), labor hours (H), gross output (G), materials (M), industry VA and material weights (w, m), industry(i)
The first term: The direct productivity effect
The sum of industry gross output productivity
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

10. ALP Decomposition Using Industry Gross Output Productivity
The second term: The material reallocation effect (RM)
RM has a negative effect on ALP if more intermediate input (M) raises gross output (G)
The third term: Hours reallocation (RH)
ALP rises if industries with VA shares above labor shares experiences growth in hours
In Korea, ALP falls because MFG industries (VA shares with VA shares above labor shares) reduce hours
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

11. ALP Decomposition Using Industry Gross Output Productivity
(A)
(B)
(B) – (A)
Aggregate labor productivity growth
(value-added) = (1) + (2) +(3)
4.3
4.9
3.6
-1.3
Decomposition using
industry gross output productivity
(1) Weighted ALP (gross output)
4.4
4.6
4.2
-0.4
(1A) Manufacturing
2.2
2.7
1.6
-1.0
(1B) Non-manufacturing
1.9
2.5
0.6
(2) Material reallocation (-RM)
-0.7
-0.8
-0.6
0.2
(3) Hours reallocation (RH)
1.2
0.1
-1.1
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

12. ALP Decomposition Using Industry Gross Output Productivity
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

13. Findings
ALP growth slowdown (-1.3%) from to is attributable to
Slowdown in MFG industry GO productivity (-1.0%) and worsened hours reallocation (-1.1%)
BUT, both NMFG industry GO productivity (0.6%) and material reallocation (0.2%) raise ALP
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

14. ALP Decomposition Using Industry Value-added Productivity
ALP growth decomposition
The first term: the sum of industry VA productivity
The second term: hours reallocation
Further decomposition of Industry VA LP growth
Capital deepening, labor quality, and TFP growth
Two groups of industries: MFG & NMFG
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

15. ALP Decomposition Using Industry Value-added Productivity
(A)
(B)
(B) – (A)
Aggregate labor productivity growth
(value-added) = (1) + (2)
4.3
4.9
3.6
-1.3
Decomposition
using industry value-added productivity
3.7
3.8
-0.2
(1) Weighted ALP (value-added)
(1A) ALP (VA) Manufacturing
1.9
2.3
1.5
-0.8
(1A1) capital deepening
1.3
1.6
0.9
-0.7
(1A2) labor quality
0.1
0.0
(1A3) TFP
0.5
-0.1
(1B) ALP (VA) Non-manufacturing
1.8
2.1
0.6
(1B1) capital deepening
1.4
(1B2) labor quality
0.2
0.3
(1B3) TFP
(2) Hours reallocation (RH)
1.2
-1.1
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

16. ALP Decomposition Using Industry Value-added Productivity
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

17. Industry VA LP Contributions to ALP, 1996-2005 vs. 2006-2014
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

18. Industry VA LP Contributions to ALP, 2006-2014
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

19. Findings
ALP growth slowdown (-1.3%) from to is attributable to
Fall in capital deepening in MFG (-0.7%) and
Worsened hours reallocation (-1.1%) due to a sharp decrease in hours in MFG
But, NMFG industry VA TFP (0.6%) raises ALP
Little changes in MFG TFP
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

20. Part 1. Summary
Changing sources of productivity growth in Korea, to
The sources of productivity growth have shifted from capital deepening to TFP growth (TFP-led growth), especially due to rise in TFP in non-manufacturing (industrial transformation)
Moreover, ALP slowdown is attributable to (1) the worsened hours reallocation due to a rapid decrease in MFG hours as well as (2) a large fall in capital investments in MFG
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

21. Part 2. Estimates of Ex-post Rates of Return to Capital by Industries
There are two methods of estimating rates of return to capital.
Following OECD Productivity Manual and
EU KLEMS Manual we use the following formula
for Ex-post Rates of Return.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

22. Estimation Formula of Ex-post Rates of Return by Industries in EU KLEMS Manual
𝑖 𝑗,𝑡 : ex-post rate of return to industry j’s capital at time t
𝑃 : price of capital or price of asset
𝛿 : depreciation
𝐾 𝑗,𝑡 : real capital stock of industry j at time t
𝐴 𝑘,𝑗,𝑡 : Kth real asset of industry j at time t
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

23. Estimates of Ex-post Rates of Return to Capital: Korea (1981-2014)
Primary Industry
Secondary Industry
Tertiary Industry
Economy-wide
1981~1990
0.3696
0.4943
0.6081
0.4086
1991~2000
0.2797
0.1813
0.1764
0.1479
2001~2010
0.2609
0.0640
0.0790
0.0664
2011
0.2658
0.0470
0.0615
0.0511
2012
0.2196
0.0292
0.0332
0.0304
2013
0.2341
0.0012
0.0155
0.0085
2014
0.2488
0.0293
0.0119
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

24. Estimates of Ex-post Rates of Return to Capital: Korea (1981-2014)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

25. Comparative Profile of Economy-wide Ex-post Rates of Return and Ex-ante Rates* of Return to Capital: Korea ( ) * 3-year Corporate Bond Rate (AA- rating)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

26. A Double-Koyck Type Acceleration Model of Investment by Industries
𝐾 : capital stock
𝑋 : output
𝑋 ∗ : desired output
(1)
(2)
(3)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

27. A Double-Koyck Type Acceleration Model of Investment by Industries
(4)
(5)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

28. A Double-Koyck Type Acceleration Model of Investment by Industries
(6)
(7)
(8)
(9)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

29. A Double-Koyck Type Acceleration Model of Investment by Industries
(10)
(11)
(12)
(13)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

30. A Double-Koyck Type Acceleration Model of Investment by Industries
(14)
(15)
(16)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

31. A Double-Koyck Type Acceleration Model of Investment by Industries
(17)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

32. A Double-Koyck Type Acceleration Model of Investment by Industries
(18)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

33. Estimation Results of Investment Functions with Real GDP and Investment
𝐼 𝑡 𝑗
𝐼 𝑡−1
𝐼 𝑡−2
𝐺𝐷𝑃 𝑡
𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒
𝑅 2
Economy-wide
***
*** *
Primary
***
***
Secondary *
***
Tertiary
***
*** *
𝑅 𝑡 𝑒𝑥𝑝𝑜𝑠𝑡
***
***
***
***
***
*** **
***
***
***
***
***
*** **
● 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒 : 3-year Corporate Bond Rate (AA- rating)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

34. Estimation Results of Investment Functions with Nominal GDP and Investment
𝐼 𝑡 𝑗
𝐼 𝑡−1
𝐼 𝑡−2
𝐺𝐷𝑃 𝑡
𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒
𝑅 2
Economy-wide
*** **
***
Primary
***
*** *
Secondary ** *
***
Tertiary **
𝑅 𝑡 𝑒𝑥𝑝𝑜𝑠𝑡
***
***
*** **
***
***
***
***
***
***
***
*** *
● 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒 : 3-year Corporate Bond Rate (AA- rating)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

35. Estimation Results of Investment Functions with Real GDP and Investment and Rates of Return Differential Variable
𝐼 𝑡 𝑗
𝐼 𝑡−1
𝐼 𝑡−2
𝐺𝐷𝑃 𝑡
𝑅 𝑡 𝑒𝑥𝑝𝑜𝑠𝑡 − 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒
𝑅 2
Economy-wide
*** **
Primary
*** ** *
Secondary
*** **
Tertiary
*** ** **
● 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒 : 3-year Corporate Bond Rate (AA- rating)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

36. Estimation Results of Investment Functions with Nominal GDP and Investment and Rates of Return Differential Variable
𝐼 𝑡 𝑗
𝐼 𝑡−1
𝐼 𝑡−2
𝐺𝐷𝑃 𝑡
𝑅 𝑡 𝑒𝑥𝑝𝑜𝑠𝑡 − 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒
𝑅 2
Economy-wide
*** **
Primary
*** **
Secondary **
***
Tertiary
***
*** *
● 𝑅 𝑡 𝑒𝑥𝑎𝑛𝑡𝑒 : 3-year Corporate Bond Rate (AA- rating)
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

37. Interpretations and Conclusion
The rates of Return in both Manufacturing and Service industries declined significantly over time in three decades.
This must have been main factor behind sluggish investment demand and lower growth rates.
Our estimates of capital income does not include mixed income which is accrued to capital from proprietors’(self employed) income.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

38. Interpretations and Conclusion
Therefore, our estimates of ex-post return to capital tend to overestimate true rates of return to capital because capital income includes proprietors’ implicit wages and salaries. It is particularly over-estimated in Primary and Tertiary sector where a large pool of self-employed exists.
The Primary sector’s ex-post rates of return are
higher than Secondary sector’s and Tertiary sectors
because land is excluded from the coverage of capital.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

39. Interpretations and Conclusion
The regression results of acceleration model of investment function based on double-Koyck adjustment specifications indicates that instead of either ex-post or ex-ante rate of return, the interest differential between the two has more explanatory power.
It is found that GDP has a positive acceleration effect on investment.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )

40. Interpretations and Conclusion
The interest rate differential (Ex-post Rate – Ex-ante Rate) has positive effect in Secondary and Tertiary industry’s investments but negative effect in Primary industry’s investment.
In other words, at given-level of ex-ante interest rate, the higher the ex-post rate of return is associated with higher investment in both Secondary and Tertiary industry. Since in Agriculture most of loans are subsidy-based preferential policy loans, they are less sensitive to ex-post rates of return.
Hak K. Pyo, Hyunbae Chun and Keun Hee Rhee Estimates of Total Factor Productivity and Ex-post Rates
of Return by Industries in Korea ( )