The Role of Developing Economies | RDP 2009-10: Global Relative Price Shocks: The Role of Macroeconomic Policies

RDP 2009-10: Global Relative Price Shocks: The Role of Macroeconomic Policies 2. The Role of Developing Economies

Adam Cagliarini and Warwick McKibbin

December 2009

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During the 1990s and 2000s, much of east and south-east Asia experienced a prolonged period of strong economic growth spurred by growth in productivity. The adoption of production processes from more developed economies helped to boost productivity levels of the economies in this region, while growth in investment helped to boost labour productivity. According to the IMF, labour productivity in Asia grew on average by 3.3 per cent per year between 1970 and 2005, of which capital accumulation contributed about 2 percentage points and total factor productivity (TFP) growth contributed 0.9 percentage points. Since 1979, labour productivity in China has grown by around 6 per cent annually (Table 1). TFP growth is estimated to account for half this growth while capital accumulation accountsw for a significant proportion. Estimates of average annual TFP growth in China's manufacturing sector are as high as 10.5 per cent since 1998.^[1]

Table 1: Growth in Labour Productivity to 2005
Annual average, per cent
	Start date	Labour productivity	Physical capital	Human capital	TFP
Japan	1955	3.1	2.0	0.4	0.7
NIEs	1967	4.5	2.6	0.6	1.5
ASEAN-4	1973	2.8	1.6	0.9	0.0
China	1979	6.1	3.0	0.9	3.6
India	1982	2.7	1.4	0.8	1.7
Other Asia	1990	2.6	1.3	0.8	0.4
Notes: NIEs (newly industrialised economies) consists of Hong Kong SAR, Singapore, South Korea and Taiwan Province of China. ASEAN-4 consists of Indonesia, Malaysia, the Philippines and Thailand. Source: IMF (2006)

While growth in productivity has had direct effects on relative prices, particularly on the goods that Asian economies export, the effects on relative prices have not solely been driven by supply-side factors. In particular, the increase in productivity sparked an investment boom in these economies, and economies that industrialise increase their demand for resources. Accordingly, the energy needs of Asia increased significantly. China, which by 2007 accounted for about 7.5 per cent of global energy consumption, was responsible for nearly 50 per cent of the growth in global energy consumption between 2000 and 2007, while the rest of the Asia-Pacific region accounted for 18 per cent of growth in world energy consumption (see BP 2008). In comparison, North America was responsible for only 5 per cent of the growth in global energy consumption. The effect of the increased demand for resource commodities, as well as the downward pressure on prices for manufactured goods that Asia produces and exports, were major contributors to the large relative price movements.

Of course, changes in relative productivity levels, taxes and shifts in consumer preferences may also affect relative prices. However, the trends in relative prices, such as we have seen in the past decade, have also been driven by demand for certain goods from countries at earlier stages of their economic development. China and India have had the effect of increasing demand for certain commodities, especially energy and mineral products, while the prices of the products they export, for which they have a comparative advantage, have not risen by as much and in some cases have fallen.

Footnote

For a range of estimates and a comparison with other countries, see Brandt, Van Biesebroeck and Zhang (2008). [1]