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Explaining the East Asia miracle: The role of urbanization

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  • Zhang, Xun
  • Wan, Guanghua
  • Luo, Zhi
  • Wang, Chen

Abstract

Defying the law of diminishing marginal returns, many countries experienced high rates of investment for a prolonged period of time during their take-offs. This paper represents a first attempt to explain this contradiction from the perspective of urbanization. Urbanization provides opportunities for investment and helps moderate the capital/labor ratio in the urban sector. In particular, it promotes knowledge accumulation through “learning by doing”. This can explain why the law of diminishing marginal returns to capital is not applicable to economies in the early period of their catching-up. More specifically, we construct a two-sector general equilibrium model incorporating urbanization and “learning by doing”, predicting that in the presence of urbanization, as long as the “learning by doing” effect is sufficiently large, capital return will depict an inverted U-shape as capital accumulates or urbanization proceeds. Empirical evidence from China confirms the theoretical prediction.

Suggested Citation

  • Zhang, Xun & Wan, Guanghua & Luo, Zhi & Wang, Chen, 2019. "Explaining the East Asia miracle: The role of urbanization," Economic Systems, Elsevier, vol. 43(2), pages 1-1.
    • Handle: RePEc:eee:ecosys:v:43:y:2019:i:2:4
    DOI: 10.1016/j.ecosys.2019.100697
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    More about this item

    Keywords

    Diminishing; Marginal; Returns; East Asia; Miracle; Capital; Investment; Urbanization; Learning by doing; O18; E61; D63;
    All these keywords.

    JEL classification:

    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement

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