Measuring the Miracle: Market Imperfections and Asia's Growth Experience

A clear understanding of the rapid development of the newly industrialized economies (NIEs) of Asia remains elusive, with disputes over the roles of technology growth, capital accumulation, and international trade and investment. Most notably, alternative approaches to growth accounting yield contradictory results: Estimates using quantities of inputs and output (the primal approach) find slow TFP growth, whereas estimates using real factor prices (the dual approach) find relatively rapid TFP growth. Further, the growth accounting studies report constant or increasing labor shares in most of the NIEs, inconsistent with theories emphasizing the importance of international trade in Asia’s development. We reconcile these apparent contradictions by taking account of economically interesting imperfections in output and capital markets, such as sizeable economic profits and government-directed credit. In Singapore, where the growth accounting disparity is largest, these market imperfections essentially fostered a two-sector economy in which some firms, part of a “favored†sector, received preferential treatment and reaped economic profits. We describe the dynamics of this two-sector framework and derive measures of technology growth, corrected for the imperfections that we quantify. We then discuss implications for broader disputes about Asian development