Trajectories to high income: Comparing the growth dynamics in China, South Korea, and Japan with cointegrated VAR models.

• The most significant common denominator in the economic growth of Japan, South Korea and China was capable bureaucracy and a developmental state that prioritized economic growth via export- and investment-led growth. • The pattern of structural breaks in Japan, South Korea, and China has been broadly similar, with China following in South Korea's footsteps by about 25 to 30 years and Japan's footsteps by about 50 to 55 years. • The GDP growth and capital–labor ratio moved together in a positive long-run relationship in Japan, South Korea and China. • China experienced growth based on total factor productivity (TFP) gains at a much earlier stage in its development path than South Korea. • At a broader level, our analysis provides cautious grounds for optimism about China's prospects for a smooth and quick transition to high income. We analyze and compare the patterns of economic growth and development in China, South Korea, and Japan in the post-war period. The geographical proximity and cultural affinity between the three countries, as well as the key role of the development state in their economies, suggest that an analytical comparison would be a meaningful and valuable exercise. Furthermore, South Korea and Japan are two of the few economies that have jumped from middle income to high income in a short period and thus offer potentially valuable lessons for China. We use Cobb–Douglas production functions to assess the long-run equilibrium relationships between per capita GDP, capital, and labor by means of cointegrated vector autoregressive (CVAR) models. We show that such equilibrium relationships cannot be rejected for all three countries, while the evidence is stronger for China and South Korea than for Japan. Our hypothesis tests show that the estimated Cobb–Douglas production functions display coefficients of capital and employment that sum up to 1 and broken linear trends that can be attributed to structural breaks and (changes in) total factor productivity (TFP) growth. We observe a striking similarity between the experience in South Korean and China, which gives some optimism that the China may be capable of graduating to high income, like South Korea. [ABSTRACT FROM AUTHOR]