This paper investigates whether or not the manufacturing sector is still important in playing the role of the engine of economic growth for countries near Korean East Sea, specifically Korea, China and Japan. By using APO databases over the period 1970-2015, it empirically examines Kaldor’s law which states correlation between GDP growth and the growth rate of manufacturing production. To do so, it controls for endogenity or simultaneity of the growth rate of the manufacturing production variable by employing two stage residual inclusion estimation procedure. It also introduces the Error Correction Model to consider the statics-dynamics paradox and cointegration relationship of non-stationary variables.
Empirical results show that the growth rates of manufacturing output are positively associated with GDP growth for all three countries, regardless of different models or estimation methods. This supports Kaldor’s law implying that manufacturing sector plays the key role of economic development and growth for three countries. This implies that the long-term growth is demand-determined, rather than supply-determined, which is not consistent with the prediction of neoclassical and endogenous growth theories.
Overall, the experience from the three countries near Korean East Sea tells us that the impacts of manufacturing output growth on economic growth are dependent on development stages. In earlier stage of development, the effects of manufacturing output on economic growth are larger than in later stages of development, which leads to different contribution to economic growth.