Physical capital accumulation in Asia 12: Past trends and future projections

The pace of capital accumulation in East Asia has simply been stunning. In this paper, we investigate sources of this fast accumulation and make projections for the future. We estimate a “convergence” equation for physical capital per capita, which is derived from an open economy growth model, using a pooled cross-country, across-decade sample of the entire world. We also conduct projections for the next two decades. We find that an economy with a low level of capital stock per capita tends to experience faster accumulation subsequently. Asian economies have certainly benefited from this “convergence effect”. But on the other hand, other factors such as a low rule of law score and high investment goods prices have worked against them. Our projection shows that, if those economies wish to maintain their current pace of fast capital accumulation, the keys would be to reduce distortions in the domestic market and to improve the quality of institutions.