Abstract
This dissertation studies the Taiwanese growth miracle after the Second World War (1961-2002). The first chapter of my dissertation investigates the sources of growth for Taiwan from 1961 to 2002 using a diagnostic tool, known as business cycle accounting, developed in the recent business cycle literature. The results show that the path of Taiwanese growth would not have been achieved without improvements in total factor productivity (TFP). In addition, there are significant distortions in capital markets in the equilibrium investment decisions of agents operating in otherwise competitive capital markets. Finally, frictions in labor markets also contribute to growth but are minor relative to TFP growth and frictions in capital markets. The second essay studies the productivity improvement in economies experiencing rapid structural transformation, i.e. resource reallocation from a low to a high productivity sector. In particular, it measures the productivity growth that is attributed to reallocating labor from the farm to the non-farm sector in Taiwan between 1951 and 2003. Examining productivity under a two-sector rather than a one-sector framework reduces the measured productivity growth by 28% in terms of total factor productivity. In other words, the results show that resource reallocation, especially that of labor, from a low to a high productivity sector plays a substantial role in accounting for the significant productivity improvement in an economy experiencing rapid structural transformation. The third essay entitled, "Understanding Taiwan's Growth Miracle: the Role of Efficiency Improvement in Capital Market" addresses the issues about capital markets following the results from the first essay. This paper examines the role played by improvements in capital market efficiency for Taiwan's growth success from 1961 to 2002. Unlike most of the literature about financial development and growth, this paper combines optimal growth theory and time series data to address this issue quantitatively. I begin by identifying the sources of Taiwanese growth using a diagnostic approach developed in the recent business cycle literature. The diagnostic results together with empirical observations of financial performance (i.e. bank efficiency) suggest a positive relationship between bank efficiency improvement and growth. To quantitatively assess the role bank efficiency plays in Taiwanese growth, I provide a neoclassical model with financial intermediaries. For the Taiwanese case, the model shows that output is 4.4% higher today as a result of bank efficiency improvements