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Measuring the evolution of Korea’s material living standards 1980–2012

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Abstract

Based on a production-theoretic framework, we measure the effects of real output prices, primary inputs, and multi-factor productivity growth on Korea’s real income growth over the past 30 years. The empirical analysis is based on a new dataset for Korea with detailed information on labor and capital inputs, including series on land and inventories assets. We find that while over the entire period, capital and labor inputs explain the bulk of Korean real income growth, productivity growth has come to play an increasingly important role since the mid-1990s, providing some evidence of a transition from ‘input-led’ to ‘productivity-led’ growth. Terms of trade and other price effects were modest over the longer period, but had significant real income effects over sub-periods.

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Notes

  1. For a broader discussion on the merits and shortcomings of GDP as a measure of welfare, see Stiglitz et al. (2009).

  2. Another step is to consider national rather than domestic income. Some of the income generated by residents is paid to non-residents, while residents receive some income from production in other countries. Domestic income can thus be augmented by the income flows received and reduced by the income flows leaving the country to arrive at the concept of national income, which is more relevant for the material well-being of residents of a country. For the majority of OECD countries there is little difference between the levels of GDP and GNI. There are however exceptions, most notably Ireland and Luxembourg; differences are also likely to be significant for many developing and emerging countries characterised by a significant presence of multinational enterprises in their territory (whose profits are then transferred abroad) and of immigrants working abroad (who transfer part of their income to their country of origin in the form of remittances). In the mid-1980s and late-1990s, Korean GDP was about 1 % smaller than GNI and the gap became smaller in later years. The present analysis therefore only deals with GDP and the associated income flows.

  3. We shall follow the convention in the System of National Accounts and use real in the sense that a value has been expressed in equivalents of consumption units by deflating it with a price index of private consumption. Real values do not necessarily correspond to quantities. For example, there are no quantities and prices making up flows of nominal income. We shall use volume to designate the quantity component that, along with a price component, makes up the value of an economic transaction. Volumes are in particular relevant in the computation of productivity, the ratio of the volume of outputs to the volume of inputs. The theory of productivity measurement is based on production functions or production possibility frontiers as in Jorgenson (1966).

  4. As pointed out by one of the referees, as the production-theoretic approach used here assumes that all imports are intermediate products and exports are distinct from final goods and services intended for domestic use, the price of domestic absorption can be viewed as the price of nontradables, whereas the price of imports and exports is the price of tradables. This facilitates the identification of terms of trade and real exchange rate effects.

  5. One standard method is to compute a nominal rate of return, given depreciation and asset price changes—see Jorgenson and Landefeld (2006). We compute a ‘balancing real rate of return’ following Diewert et al. (2009).

  6. The GDP function was introduced by Samuelson (1953). Alternative presentations include in particular Diewert’s (1973) variable profit function and McFadden’s (1978) restricted profit function.

  7. Note that \((\partial {\text{g}}/\partial {\text{t}})/{\text{g}} = (\partial ({\text{G}}/{\text{P}}_{\text{C}} )/\partial {\text{t}})/{\text{g}} = (\partial {\text{G}}/\partial {\text{t}})/{\text{gP}}_{\text{C}} = \uppi\) and \(\partial {\text{g}}/\partial {\text{p}}_{\text{i}} = \partial {\text{G}}/\partial {\text{P}}_{\text{i}}\).

  8. Below, we shall further break down trading gains into a terms of trade effect and a real exchange rate effect.

  9. It is of course possible to compute the real income contribution of sub-items of private final consumption expenditure as real prices of these sub-components may change over time. However, the sum of contributions of these sub-items will always equal zero if index numbers have been computed consistently.

  10. While output data is already available by industry and institutional sector, capital input data has not yet been compiled at this level. This has been scheduled by the Bank of Korea for 2014 in accordance with 2008 SNA. The dataset underlying the present analysis is available on demand. It will also be posted on the BOK’s website in 2014 as part of the revised set of national accounts.

  11. See http://ecos.bok.or.kr/EIndex_en.jsp for national accounts data. The BOK uses a chain Laspeyres index in the construction of its volume measures.

  12. As with expression (10), the theoretical measure of volume output growth, \({\text{d}}\ln {\text{q}}/{\text{dt}} = \sum\limits_{{{\text{i}} = {\text{C}},{\text{GV}},{\text{I}},{\text{X}},{\text{M}}}} {\frac{{{\text{P}}_{\text{i}} {\text{q}}_{\text{i}} }}{{{\text{P}} \cdot {\text{q}}}}} {\text{d}}\ln {\text{q}}_{\text{i}} /{\text{dt}}\) has been approximated by averaging two discrete measures of output growth, ∆lnq tP  ≡ ln(Pt·qt) − ln(Pt·qt−1) and ∆lnq tL  ≡ ln(Pt−1·qt) − ln(Pt−1·qt−1). Making use of the nominal relationship Pt·qt = ∑i P ti q ti , approximating ∆lnq tP and ∆lnq tL with a first-order Taylor series, and taking averages, one obtains the Törnqvist index of output growth used for our calculations.

  13. For more details on the KIP database, visit www.kpc.or.kr/eng or http://asiaklems.net.

  14. The KIP database provides data on labour and capital inputs as well as on productivity growth. Only labour measures are used here, however, whereas capital input measures rely on new data that is directly compatible with Korea’s national balance sheets and national accounts.

  15. This issue has been raised in Diewert et al. (2009), in the case of Japan, especially for land. Similar patterns for land prices have prevailed in Korea and would lead to negative user costs of land for a number of periods if the observed revaluation term were used in the user cost equation.

  16. For an industry-level examination of user costs and rates of return in Korea, see Pyo et al. (2009).

  17. Changes in land value estimates are the most significant departure from Cho et al. (2012). In previous work, land value estimates were based on the publicly appraised value of land which has been extrapolated backward with a rate of land price indexes, whereas in the current work land values reflect (approximately) market prices. This change resulted in a significantly higher value of land since the mid-1990s and a significantly lower value before that time.

  18. For the entire period at hand, this figure seems to confirm the East Asian miracle as ‘input-led’ growth, as argued by Krugman (1994), Young (1994) and Lau and Kim (1994). If we focus on more recent years, however, the observation would be different.

  19. Hahn and Ryu (2010) identify factors that are external, rather than internal to Korea as the main reasons for the decline in terms of trade during this period. In particular, they observe that China’s trade expansion raised import prices for oil and raw materials while lowering the export prices of manufactured products.

  20. 2012 seems to mark a departure from this trend but it was mentioned earlier that labour input growth figures for 2012 are preliminary and may be revised.

  21. It remains open how the eventual implementation of the 2008 SNA with its capitalisation of R&D expenditure and military assets will bear on the results. Some caution is also in place with regard to the period 2009–2012 because of the preliminary nature of labour and capital input data.

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Acknowledgments

Views expressed in this document are those of the authors and do not necessarily reflect the views of the Bank of Korea, the OECD or its Member countries. Financial and in-kind support by the Bank of Korea to this work is acknowledged. The authors are grateful to Seung-Hee Koh for excellent research assistance provided during the project and thank participants in the 2012 EMG Workshop in Sydney, Australia, for helpful comments. Very helpful comments and suggestions from two anonymous referees are gratefully acknowledged.

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Authors and Affiliations

  1. Statistics Department, The Bank of Korea, Seoul, Korea

    Taehyoung Cho

  2. Research Department, The Bank of Korea, Seoul, Korea

    Junghoon Kim

  3. OECD Statistics Directorate, 2, rue André Pascal, 75775, Paris Cedex 16, France

    Paul Schreyer

Authors
  1. Taehyoung Cho
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  2. Junghoon Kim
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  3. Paul Schreyer
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Corresponding author

Correspondence to Paul Schreyer.

Appendix

Appendix

See Tables 3 and 4.

Table 3 Sensitivity of results to choice of remuneration rates of self-employed persons
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Table 4 Fixed asset types, service lives and DBRs used for a geometric approach
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Cho, T., Kim, J. & Schreyer, P. Measuring the evolution of Korea’s material living standards 1980–2012. J Prod Anal 44, 157–173 (2015). https://doi.org/10.1007/s11123-014-0404-0

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