Adding education reduced the part of growth that could not be explained, thus shrinking the haystack in which TFP growth (and knowledge) remained hidden. Some analysts even concluded, perhaps too quickly, that physical and human capital, properly accounted for, explained all or virtually all of the East Asian economies’ rapid growth, leaving knowledge as a separate factor out of the picture. One reason these analysts came up with low values for TFP growth is that they incorporated improvements in labor and equipment into their measurement of factor accumulation.
So even their evidence of low TFP growth in East Asia does not refute the importance of closing knowledge gaps. Indeed, it shows that the fast-growing East Asian economies had a successful strategy to close knowledge gaps: by investing in the knowledge embodied in physical capital, and by investing in people and institutions to enhance the capability to absorb and use knowledge.
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