Some methodological problems with the neoclassical analysis of the East Asian miracle

This paper discusses the recent controversy over the sources of economic growth in East Asia. This empirical work has either used growth accounting or estimated econometrically aggregate production functions. It is shown that it is possible to approximate the value‐added accounting identity (i.e., value added equals labour's compensation plus total profits) by a mathematical expression that has all the properties of a well‐behaved neoclassical aggregate production function. This implies that statistical estimations of putative aggregate production functions can provide no independent evidence as to whether they accurately describe the production technology of the economy or, indeed, whether the aggregate production function actually exists. A corollary is that the conventional measures of the growth of total factor productivity cannot be unambiguously interpreted as an estimate of the rate of technical progress. The paper reviews the works of Kim and Lau and Young and, in the light of this, explains why both analyses and interpretations of the notion of total factor productivity growth as the rate of technical progress are problematical.