Dynamic efficiency in world economy

Abstract

Based on the AMSZ (1989) criterion, we exploit comprehensive datasets to estimate the dynamic efficiency of world economy. The results reveal that the representative economies conform to a “U-shaped pattern” in their evolution of capital accumulation. That is, a period of decreasing efficiency (over-accumulation) followed by increasing efficiency (de-accumulation). Contrary to previous evidence, the bias-corrected estimates show that major economies have been inconsistently dynamically efficient. As a prime example, China today is unquestionably in a state of severe dynamic inefficiency, and the inefficient status is likely to continue in near future. We also document the limitations of the AMSZ criterion and point out promising research directions in the efficiency literature.