Working Paper: NBER ID: w7441
Authors: Charles Hulten; Sylaja Srinivasan
Abstract: We estimate the rate of total factor productivity growth in Indian manufacturing industry for the period 1973-1992, and compare the results to those obtained by Young for the East Asian Tigers. We then interpret our results in light of Krugman's hypothesis that, because the Asian Miracle was driven by capital formation under diminishing marginal returns, it is not sustainable. We suggest a reinterpretation of the sustainability problem that recognizes the true role of TFP as a motive force in output growth. Past studies have compared the TFP residual to the growth rate of output and used this ratio as a measure of the importance of TFP as a source of growth. We argue that this is an erroneous way of assessing the role of TFP, because it ignores the additional capital formation made possible by an increase in productivity and therefore understates productivity's true importance. Our estimates suggest that the understatement may be quite large, and that one might better ask if the growth rate of TFP, rather than capital growth, is sustainable.
Keywords: Total Factor Productivity; Indian Manufacturing; Economic Growth; Asia
JEL Codes: O47; O11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| TFP growth (O49) | output growth (O40) |
| capital growth (O41) | output growth (O40) |
| TFP growth (O49) | capital formation (E22) |
| capital formation (E22) | output growth (O40) |