On the myth and mystery of Singapore's 'zero TFP'

Abstract

This paper questions recent analyses about the sources of growth and the role of technical progress in Singapore. Using econometric estimation of aggregate production functions or growth accounting, these analyses have concluded that technological progress, or total factor productivity (TFP) growth, has played no role (if not a negative one) in the growth episode of the city-state. I show that these analyses cannot establish conclusively that Singapore grew without productivity. First, the notion of aggregate production function is questioned on theoretical grounds. Second, it is shown that aggregate production functions and income accounting identity (i.e., value added equals the wage bill plus profits) are isomorphic representations to one another, and that the latter can be rewritten via an algebraic transformation as a form that looks like a production function. This isomorphism prevents the proper testing of the production function, and the unambiguous connection of TFP growth with technical progress.