Comparative explanations of East Asia's growth using neoclassical and post-keynesian models

The study estimates economic growth in eight selected East Asian countries using two growth models from two competing schools of thought. The first model is the Post-Keynesian model (Balance-of-Payment Constrained growth model). In this model, demand variables from export and capital inflows determine the limit of economic growth in the long run. The study uses prior estimates income elasticity of demand for import and export using a two-stage least square technique to eliminate the endogeniety problem then it calculates the predicted growth by the definition of the Balance-of-Payment Constrained growth model. The second model is the neoclassical model developed from Solow growth model focusing on the supply side variables determining economic growth. The study relaxes the assumption of exogenous technology and makes it endogenous of capital inflows. Two predicted output growth series from two models are obtained for each country and for the balanced panel data for the whole region. The performance of each model is evaluated by two methods: the discrimination approach and the discerning approach. The study found that the output growth series defined by the augmented Solow growth model can better explain the actual growth than the output growth series from the Balance-of-Payment Constrained Model. In addition, the study hypothesized that financial structure is one of the important factors that these two models omitted. A set of financial variables representing a different part of the financial structure is used for explaining the error series from both growth models. The results show that the selected financial variables can better explain the error from the Post-Keynesian model than the error from the neoclassical growth model.