Inspiration and Perspiration Factors in Economic Growth: The Former Soviet Union Area versus China (ca. 1920-2010)

In this paper we extend our previous studies (Didenko et al., 2012; Földvári et al., 2012; Van Leeuwen et al., 2011) on the role of conventional factors of production (fixed, or physical, and human forms of capital) and their productivity depending on their interrelations and economic development policies. Methodologically based on Solow (1956, 1957) and Mankiw, Romer, and Weil (1992) we apply our theoretical models on the factors of economic growth to compare China with the republics of the former Soviet Union and, to this end, create a new database for both regions. Following Krugman (1994), we decompose economic growth in perspiration (i.e. production factors) and inspiration (i.e. TFP, which consists in turn of technical efficiency of the production factors and a general production frontier) factors and find that in the socialist central-planning period economic growth was largely driven by physical and, to lesser extent, human capital accumulation. Moreover, at these times conventional TFP change was strongly negative (1930s for the FSU, 1950s for China). This means that focusing mainly on physical capital increases the factors of production (hence increasing growth via perspiration) but reduces the technical efficiency of the factors of production strongly (hence lowers the growth via TFP, i.e. inspiration). After the economic transitions were launched (end 1970s in China and end 1980s in the FSU) the inspiration/perspiration pattern changed. China managed to keep technical inefficiency relatively moderate, largely by massively increasing its human capital (which made it easier to make use of physical capital). At the same time, they managed to increase their productivity frontier. In the FSU, however, the change in the human to physical capital ratio was primarily caused not by an increase of human-, but rather by a decrease of physical capital. This means that, even though technical efficiency relatively increased, the general productivity frontier remained stable or declined. This changed in the late 1990s and the start of the 21th century when the FSU started to recover somewhat, only to reach the 1990 level.