Determinants of Economic Growth in Asian Countries

Chapter 01: Introduction

1.1 Chapter Introduction

The introduction is the first chapter of the research that highlights the aim and objectives of the
study. The elements covered in the section include research aim and objectives, research
background, scope and significance of the study. Moreover, the outline for the entire dissertation
has been discussed; lastly, the section has been concluded with a brief summary of the chapter.
The discussion incorporated in following chapter is beneficial because it assists the researcher to
establish the parameters on the basis of which further research activities will be carried out on
specified dilemma.

1.2 Research Background

Interpretation of economic growth and stability needs to be carried out to express the pattern by
which appropriate enhancement of national income is observed. One of the primal reason or
cause to interpret economic growth is to express dependency upon particular source for
generation of income on national level. Economic development is primarily dependent upon four
sources, which are consumption, investment, government expenditure and net of exports
(Mathews and Hu, 2007). Moreover, it has also been assessed that to some extent, one of the
source is prominent for government in terms of generating income. One the major scale,
developing regions primarily dependent upon domestic consumption or investment from
international sources. On the other hand, developed regions have expressed dependency upon
either investment or government expenditure other than consumption in order to generate
appropriate income on national level. Nonetheless, it depends upon the situation that whether
dependency upon investment or government expenditure needs to be carried out (Suhrcke, Rocco
and McKee, 2007).

For example, Malaysia is one of the prominent regions that are dependent upon services offered
to domestic as well as international regions of the world for generation of income on national
level. In this situation, appropriate level of dependency has been expressed upon consumption by
Malaysia for generation of appropriate income and for increasing the potentiality of consumption
source for increasing the income, dependency upon government expenditure next to investment
is carried out (Hanushek and Woessmann, 2008). On the other hand, Chinese is one of the
prominent regions that are dependent upon exports for generating income over the period of
years. However, for increasing the volume of particular source, increased level of dependency
upon investment from foreign sources is expressed followed by modifications in economic and
political structures is carried out by China. Overall, it has been assessed that increased level of
dependency expressed upon international as well as domestic sources needs to be carried out and
valuation of these sources is based on current situation as well as prime objective that needs to be
achieved over the period of years (Leigh and Blakely, 2016).

As per Akbar, Imdadullah, Ullah and Aslam (2011); Fatas and Mihov (2013), to measure the
economic health of the country, the GDP has been considered as a key indicator of the economy.
It measures the living standards of the country along with the monetary value of the produced
goods and services in a country. The GDP also measures the overall value of income while
indicating the economic well-being and assess different types of activities in which an economy
is engaged for a certain period. According to Cuaresma, Doppelhofer and Feldkircher (2014), to
measure the economic growth of the country, there are several factors that must be considered
such as inflation rate, employment rate, life expectancy, government expenditures and
consumptions and trade terms of the country. In the current study, the determinants of the
economic growth have been assessed in the case of Asian countries including Japan, India,
Thailand, Pakistan, Indonesia, Sri-Lanka and Bangladesh.

1.3 Research Aim and Objectives

The aim of the current research is to investigate the determinants of economic growth in Asia.
The objectives of the study have been developed below:

 To understand the concept of economic growth.

 To identify the determinants of economic growth in a country.
 To illustrate the determinants of economic growth in Asian country.
 To investigate the significance of identified determinants on the economic growth (GDP)
of Asian countries.
  To provide recommendations to Asian countries regarding the economic growth based on
the findings of the current study.

1.4 Research Scope and Significance

The scope of the current study is limited to the economic growth of the Asian countries including
Japan, India, Thailand, Pakistan, Indonesia, Sri-Lanka and Bangladesh. To assess the
determinants of the economic growth, the economic data for the stated countries have been
extracted for the period of twenty years. In consideration with the research significance, the
study is highly significant for the selected countries as it contributes in the economic growth. The
study identifies the factors that improves economic growth of the country while revealing the
factors that usually effects the economic growth i.e. GDP per capita of the economy for the
period.

1.5 Dissertation Outline

Introduction: The first chapter highlights the aim and objectives of the study. It describes the
structure of the dissertation along with the scope and significance of the study.

Literature Review: The literature review is the second chapter of the research that studies
research topic in the light of past studies and articles.

Empirical Framework and Data Description: The chapter summarises the method used and
describe the data that has been extracted for data analysis.

Empirical Analysis: This chapter illustrates the findings of the data analysis. It covers the results
obtained from data analysis in order to conclude the study.

Conclusion: The conclusion is the last chapter that covers summary of the findings of the
dissertation.
1.6 Chapter Summary

The discussion incorporated in above chapter has developed an efficient overview of current
study. The primal motive on the basis of which researcher tends to investigate the problem
statement is expression of dependency upon consumption, investment, government expenditure
or net of exports for generation of income. The researcher is motivated to assess prominent
factors that had increased the economic growth of Asian region. The primal focus of the
researcher is leaned towards considering multiple aspects of economic development and
developing as well as developed regions of China to perform the study on particular dilemma.
 Chapter 02: Literature Review (2500)

2.1 Chapter Introduction

The literature review is the second chapter of the study that studies research topic in the light of
past studies and articles. The chapter elaborates the key phrases and concepts covered in the
research topic in the light of theories and models discussed in the previous studies. The gap for
the current research has been discussed along with the hypotheses and framework for the current
study. In last, the chapter has been concluded with a brief summary.

2.2 Concept of Economic Growth

There had been many theories which came and presented their view on economic growth. The
initial theory in this regard was considered in the classical comics and belonged to the modern
school of thought. There are numerous ideas presented that proved to be fundamental in the
classical economics and were proposed in year 1976 by Professor Adam Smith (knows o be a
Scottish Economist). He presented a book with a title of “Wealth of Nations”. This book was a
revolution in Britain and a critical contribution that condoned the advantages of free market
economies responsible for promoting the free competition and laissez-faire concepts. The author
explained that the maximisation of wealth of a country is occurred where the citizens of the
country follow their self-interest. The main concept was extended further when labour theory of
value came into light. The theory presented that in a competitive environment, the goods’ prices
sold is said to have a tendency to be in proportion with respect to the labour costs related to
produce such goods. The theory was elaborated by another researcher named John Stuart Mill
who applied this theory in the modern social environment (Akbar, Imdadullah, Ullah et al 2016).

Later on, a model came into existence called, Harrod-Domar model which was developed to use
the capital productivity and saving level in order to explain the economic growth. The model
suggests that long-run equilibrium economic growth is not usual within a country’s economy. It
further implied that it is impossible virtually to achieve such equilibrium (Petrakos and
Arvanitidis, 2015).
This means, when savings ratio, rate of labour force and capital output ratio is used, the model
affirms that if any of the mentioned variables shifts from equilibrium, the effect will be
detrimental upon the economy. This can occur in increase in unemployment or extended
inflation. In order to acquire equilibrium, the model focused on the comparison among the
natural growth rate and growth that is dependent in the investment and savings pattern of
businesses and households. The natural growth rate generally relies on the incline in labour force
with the subtraction of technological change. In a scenario, when savings ratio is inclines the
funds provided for borrowing will also incline that permits higher investment in capital and
hence a progression in technology is observed. The main assumption of this model is the term of
fixed proportions, there is labour which is incapable to be replace by production capital (Petrakos
and Arvanitidis, 2015).

In the view of Lewis (2013), the term economic growth is associated with the increased value for
goods and services produced in the country while revealing the inflation rate for the period. It
can be measured with the help of gross domestic production i.e. GDP rate of the country for the
period. Herndon, Ash and Pollin (2014) explained that to compare the economic position of
different countries, the economic growth i.e. GDP can be considered as a key indicator. It
reduces the effect of inflation rate from the market value of goods and services. According to
Cingano (2014), the major determinants of the economic growth that effects GDP rate includes
labour productivity, changes in the demographic factors and inflation rate for the period. The
secondary information asserts that the political, economic and social factors are considered as the
factors that influence economic growth in the country for the period (Scully, 2014).

2.3 Determinants of Economic Growth

There had been extensive research performed on the exploration of determinants on economic
growth. The Akbar, Imdadullah, Ullah et al (2016) researched on the complementary effect of
capital innovation and accumulation on long term economic growth. The idea was based on the
general assertion that both aforementioned variables played their role in short term economic
growth while the rate of technological progression is responsible in contributing to the long term
economic growth.
The research concluded that if the capital innovation and accumulation plays an input to
Research and Development (R&D) due to the relation among the capital innovation and
accumulation, then the subsidization of whichever human or physical capital accumulation will
reveal in an enduring effect on nation’s economic growth (Akbar, Imdadullah, Ullah et al 2016).

There are various determinants on the basis of which appropriate growth of economy is
interpreted, which are segregated into four categories, which are named as consumption,
investment, expenditure of government and net of exports. None of the region has expressed
increased level of dependency upon all the sources for increasing economic development
because formulation of political and economical structure is based on either enhancement or
expansion of consumption, investment proportionality or expenditure made by government
(Toya and Skidmore, 2007). Moreover, if increased level of focus is presented on particular
sectors then other economic sectors might not deliver efficient degree of benefit on either
financial or on the nonfinancial bases. Moreover, to a certain level expression of dependency
upon two sources and modification of policies according to the situation is carried out by
developing economies as it supports the development of economy on the long terms scale.
Overall, it depends upon the situation that whether expression of increased level of dependency
upon one source or multiple sources for generation of income in effective manner (Cypher and
Dietz, 2008).

For example, if one region expresses dependency upon investment from foreign sources then
changes in monetary policy will be carried out in effective and efficient manner. On the other
hand, if one region expresses dependency upon consumption then control on inflation rate needs
to be carried out in effective manner and for minimization of inflation rate, value of currency as
well as interest rate needs to be carried out because accumulated assessment of these factors on
the long term scale, controls the inflation rate and appropriate control on prices is observed on
the long term (Fagerberg and Srholec, 2008). However, if one region expresses appropriate
degree of focus on two sources then there is a reduced probability that accumulated degree of
control is expressed upon consumption and investment as primary sources for generation of
income. Nonetheless, in this particular situation, primary source of income is expressed upon
consumption and investment from foreign source is expressed as the supportive factor in terms of
increasing the economic development on the short term as well as on the long term in effective
and efficient manner (Haggard and Kaufman, 2008).

Borensztein, De Gregorio and Lee (2008) examined the sources of economic growth in China
and South Korea in year from 1989 to 1999. The researcher used cross-sectional regression
analysis and the results of the study showed that the index of real exchange rate distortion and
variability of the real exchange rate were negatively associated and significant to long term
economic growth. The investment rate was positive and significant to long term economic
growth. Additionally, the research revealed that when volatility of exchange rates are higher, the
degree of technological diffusion of advanced economies increases. Consequently, the research
determined that the outward orientation plays a fundamental part in accelerating technological
development in the economy which is attained by a stable regime of real exchange rates and a
low degree of protection.

Barro (2013) examined the link among real GDP, trades, state enterprises, inflation, investment,
enrollment in higher education and economic growth in Tokyo. With the collected data, the
research found that the enrollment in the trade and the university was positively associated and
clearly the average annual growth rate of GDP per capita. On the other hand, inflation and public
companies are negatively and significantly linked to economic growth. Their study also showed
that education, private companies, and foreign trade are important determinants of economic
growth in the long term of the country.

Tsai (2014) examined the relationship between economic growth and human capital in Asian
countries for the period of 1990- 2000 and came to numerous conclusions. They found that in
less developed Asian countries, human capital formation has been significantly co-integrated
with long-term growth (with a self-relationship). On the other hand, as a nation grows and
reaches the technological limit, as China has developed over the past decades, technology itself
is more abundant with a greater share of human capital dedicated to the increase technological
limit. This was noted and concluded that for Asian countries, co-integration tends to exist among
the level of economic growth and human capital.
2.4 Modification in Policies

In one of the research data was gathered by top five Asian nations to study the connection or
linkage with the long term economic growth and fiscal policy. The data was collected from year
2005-2015 where the outcome of the research identified that the expenditure of the productive
government lays fundamental and positive relationship with the long term economic growth of
chosen Asian countries. The negative effect was identified in the form of distortionary taxes yet
important relationship with long term economic growth of chosen Asian countries. The study
found that tax production costs increased economic growth, while financial policies have
reduced economic growth distorting (Tsai, 2014).

In another research, the experimental results show that productive tax policies based on budget
surplus, public savings and institutional quality are positively and significantly associated with
economic growth (Barro, 2013). Moreover, tax policy, combined with distorting budget deficits,
taxes, consumption distortions state and public companies and significantly negative associated
with economic growth. These results are similar in all Asian countries. However, it was noted
that the impact of fiscal policy on economic growth is weak and are subject to econometric
methodology (Barro, 2013).

In order to increase the economic development over the period of time, modifications in two
categories of policies needs to be carried out. The two categories of economic policies are named
as monetary and fiscal policies. Monetary policy in general are associated with modification in
interest rate as well as supply of money in the market. On the other hand, fiscal policies are
leaned towards management of tax rate for increasing revenue as well as expenditure made in
order to increase economic development (Cooke and Lazzeretti, 2008). Nevertheless, it depends
upon the situation that whether changes in monetary policies needs to be carried out or fiscal
policies needs to be modified in appropriate manner. Nonetheless, certain situations are also
observed by region where accumulated changes are observed in financial as well as nonfinancial
aspects. In this situation, decrease in the money of supply and increase in tax rate is observed
that on the long term scale increases the economic development is observed in effective and
efficient manner (Tallis, Kareiva, Marvier and Chang, 2008).
For example, if one government makes the decision of increasing the economic development
through consumption then decrease of money value in controlled rate followed by decrease in
interest rate is observed. In this manner, appropriate development of economy on the long term is
observed. After making appropriate changes in the monetary policy, modification in fiscal
policies is carried out where increase in tax rates is carried out in segments that are related to
consumption (Cooke and Lazzeretti, 2008). In addition to this, certain changes are also carried
out in terms of decreasing the tax rates for sectors that are negatively influenced by monetary
policy changes and devaluation of currency. On the other hand, if decrease of money supply is
carried out then increase in tax rate is observed to balance out the situation for economic
development and stability over the period of years. In total, it has been assessed that due to
changes in one segment of policy, similar degree of changes might be observed in second
segment of policy (Tallis, Kareiva, Marvier and Chang, 2008).

2.5 Research Gap

In an overall perspective, it has been assessed that on the major scale, economic development is
either dependent upon multiple factors such as inflation rate, exchange rate and purchasing
power parity. Nonetheless, there are various factors that on the short term as well as on the long
term influence the economic development over the period of time. Nonetheless, one of the major
gaps identified in past researches is leaned towards interpreting dependency upon one of the
factors that makes efficient contribution. In addition to this, confusion is observed in past
researches for countries that are associated in Asian region in terms of increasing economic
development over the period of time. The assessment of gaps identified in past researches has
justified the fact that on major scale, element of dependency needs to be expressed upon
consumption, investment, government expenditure or net of exports for generation of increased
level of income on national level. The gap identified in particular case has motivated the
researcher to perform study in particular dilemma.

2.6 Research Framework

Formulation of framework is essential because it assists the researcher to identify core variables
of the study followed by probable relationship between identified variables. Based on the
identified variables, the framework for the current study has been developed below:
 Figure 1: Research Framework

(Source: Author’s Own)

In evident with the figure above, the dependent variable of the study is economic growth of the
Asian countries that has been measured through GDP rate per capita for the period. The
independent variables of the study are determinants of the economic growth including exchange
rate, inflation rate, purchasing power parity and government’s price level for the period.

2.7 Research Hypotheses

H0: There is an insignificant impact of identified determinants on the economic growth of Asia.

H1: There is a significant impact of identified determinants on the economic growth of Asia.

2.7 Chapter Summary

In an overall perspective, it has been assessed that on the major scale, economic development is
based on multiple aspects or factors. On the major scale, element of dependency is expressed
upon either consumption or investment and government expenditure is a supportive element to
increase the degree of consumption or investment. Modification in the taxation policies
accordingly is one of the major factors that on the short term as well as on the long term makes
efficient contribution in economic development. Major gap identified in particular case is leaned
towards assessment of domestic as well as international sources for verification of economic
development in effective and efficient manner and this particular case is the primal motivation
factor for performance of current study.
 Chapter 03: Empirical Framework and Data Description

3.1 Chapter Introduction

The third chapter of the research is research methodology that identifies the tools and techniques
that have been used to carry out the entire process. The chapter covers methodology of the study
in terms of research strategy, research philosophy and approach adopted in the study. The other
elements covered in the section include data collection sources, data analysis technique and in
last, the section has been concluded with a brief summary of the chapter.

3.2 Research Methodology

The research methodology is the process of tools and methods that have been applied on a
particular source of study. It elaborates the techniques that have been utilised in the study in
order to carry out the research process and conclude the findings of the study.

3.2.1 Research Strategy

Collection of data for research activities is carried out on the basis of strategy formulated. In
general, strategy is of two categories, which are named as experimental and non-experimental
strategy (Savin-Baden and Major, 2013). The primal difference between these categories is the
manipulation of variables through which efficient data can be collected in effective manner.
Non-experimental research strategies incorporate different categories, which are named as
archival, survey, interview and other similar categories of strategies (Saunders and Lewis, 2014).
Based on the nature of the research, the archival research strategy has been adopted by the
researcher. In this study, the secondary data of economic growth have been extracted; therefore,
the archival strategy has been used in the research process.

3.2.2 Research Approach

Research approach is one of the prominent elements that assist the researcher to determine the
pattern by which core motive will be achieved. In total, there are two core categories of approach
through which research motive is achieved and these two categories are named as inductive and
deductive approach (Savin-Baden and Major, 2013). If researcher tends to present theoretical
approach then deductive research approach is preferred. On the other hand, if researcher is
motivated to investigate an existing theoretical approach then consideration of inductive research
approach will be carried out (Saunders and Lewis, 2014). The approach for the current study is
deductive depicting the nature of the research topic. The variables for the current research are
identified including economic growth i.e. GDP and the factors that influence economic growth
for the period. Thus, to assess the cause and effect relationship between variables and to test the
existing theory of the economic growth, the deductive approach has been adopted by the
researcher.

3.2.3 Research Philosophy

Research philosophy primarily expresses the focus or the primary base with regard to
performance of research activities. In total, three categories of philosophies are present among
which single or multiple research philosophy can be preferred and these categories are named as
interpretivism, positivism and realism (Christensen, Johnson and Turner, 2011). If researcher
tends to evaluate or interpret prominent variables then researcher will prefer interpretivism
research philosophy. On the other hand, if researcher is motivated to identify the positivity of
relationship between identified factors then researcher employs positivism research philosophy
(Yin, 2013). In the current study, the positivism research philosophy has been used by the
researcher to assess the determinants of the economic growth in the Asian countries. The
positivism philosophy led researcher to extract the secondary data of the Asian countries and
reveals the significance of identified determinants on the economic growth of the countries.

3.3 Data Collection Sources and Nature of Data Collected

There are two major sources of data collection including primary source and secondary sources
of data. The consideration of each source is dependent upon various aspects. Nature of the study
and consideration of approach for performance of study are two core factors on the basis of
which sources are preferred for data collection. However, if data is gathered on customized bases
then preferred source is secondary (Yin, 2013). Moreover, nature of data collected for research
activities are also of two categories, which are named as qualitative and quantitative. If gathered
data can be quantified or interpreted then collected data is qualitative or quantitative in nature
respectively. Both of these segments are correlated with the primal focus of the study and pattern
through which particular objective needs to be achieved. There are various categories of
techniques through which data will be collected for research activities (Saunders and Lewis,
2014).

In the current study, the secondary sources of data collection have been utilised as the data
required in the current study is available on the World Bank and other sources such as
Bloomberg etc. The nature of the data extracted in the study is associated with the economic
growth of the Asian countries. The data have been gathered for the period of twenty years and
the selected Asian countries are Japan, India, Thailand, Pakistan, Indonesia, Sri-Lanka and
Bangladesh. The variables considered in the study includes GDP per capita, exchange rate,
purchasing power parity, price level of government and inflation rate etc. The sample of 7
countries has been selected for the collection of the data; however, the convenient sampling
method has been used to select the sample of countries randomly.

3.4 Data Analysis Technique

Similar to nature of data collected from prominent sources, evaluation of data is also segregated
into two categories, which are named as statistical and non-statistical analytical technique. The
primal difference is quantification as well as consideration of statistical assistance for
performance of research activities. If gathered data is qualitative in nature then researcher will
prefer non-statistical analytical technique (Savin-Baden and Major, 2013). On the other hand, if
gathered data is quantitative in nature then consideration of statistical analytical technique.
Statistical analytical techniques are of two categories, which are named as univariate statistical
analytical technique and bivariate statistical analytical technique (Saunders and Lewis, 2014).
Nevertheless, to analyse the collected data, the E-views software has been utilised to assess the
panel data for Asian countries. The statistical tests performed in the study are estimation of panel
regression data and correlation analysis between variables.
Chapter 04: Empirical Analysis

Chapter 05: Conclusion

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