Where Do We Invest? A Cross-Country Comparison

Woo Jung, Kookshin Ahn and Kittack Hong
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Woo Jung: Center for International Business and Economic Studies, University of Colorado, Denver
Kookshin Ahn: Department of Economics, Chung-Ang University
Kittack Hong: Department of Economics, Chung-Ang University

Journal of Economic Development, 2000, vol. 25, issue 1, 95-109

Abstract: This paper suggests that an over-investment on real estate may be one major source of the fundamental weakness of some financially troubled Asian economies. An over-development of the real estate sector could dissipate the crucial process of building a strong productive capacity of the economy. We analyze investments and savings in Korea and compare with those of Japan, Taiwan, and Thailand. A few noticeable facts stand out between Korea and Taiwan. Korean growth performance was very close to Taiwan who was saving and investing 50% less in terms of the percentage shares of GDP. One possible explanation can be obtained in the decomposition of the total investment. Korea invested 36% of her total investment into the machinery and equipments category and Taiwan spent 48.8% of her total investment. We also attempted to show the measurement error as a possible source of grossly overvalued total saving rate in Korea. Once the measurement error is properly corrected, then households¡¯ consumption occupies 68.9% of GDP and the total saving and investment ratio become 24% of GDP, which is very close to that of Taiwan. If the true saving rate of Korea is around the mid-20%, not the mid-30%, and if the past investment have heavily concentrated on housing and its related activities, then the Krugman-Lau debate tells us how we might prolong the past growth performance. Korea could improve the saving rate, say to the level of Japan. This input-driven growth can also be made more effective by improving the efficiency of investment.

Date: 2000
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