Japan

1
Japans High Growth Era

• Prof. Michael Smitka
• Fall 2000
• Washington and Lee University

2
Growth Accounting Framework

• Underlying this approach is a production function
  for the macroeconomy
• Furthermore, as a growth model Says Law holds
  supply creates its own demand
• This is a wholly supply-side model
• In the long run all capacity is utilized or
  disappears!

3
Production Function

• Y f (K, L, tech, etc) AKaL(1-a)
• Hence in growth terms
• gY gA agK (1-a)gL
• To implement we just need to know
• past or likely future growth rates or values of
• Inputs
• factor shares a
• productivity growth gA

4
Growth Accounting

• Contributions, 1961-71
• 1.78 Labor
• 0.11 Hours
• 1.09 Workers
• 0.58 Educ etc
• 2.57 Capital
• 2.43 Knowledge
• 2.78 Structural (agri, EOS, trade)
• 9.56 Total

• Contributions, 1970s
• 0.68 Labor
• -0.15 Hours
• 0.68 Workers
• 0.50 Educ etc
• 0.86 Capital
• 1.28 Knowledge
• 0.42 Structural (agri, EOS, trade)
• 3.24 Total

5
Growth Accounting Applied

• Sources, 1961-71
• 1.78 Labor
• Hours 0.11
• Workers 1.09
• Educ etc 0.58
• 2.57 Capital
• 2.43 Knowledge
• 2.78 Structural (agri, EOS, trade)
• 9.56 Total

• Sources, 1970s
• 0.68 Labor
• Hours -0.15
• Workers 0.68
• Educ etc 0.50
• 0.86 Capital
• 1.28 Knowledge
• 0.42 Structural (agri, EOS, trade)
• 3.24 Total

• Sources, 2000s
• -0.20 Labor
• Hours -0.20
• Workers -0.10
• Educ etc 0.10
• -0.10 Capital
• 1.20 Knowledge
• -0.20 Structural (services, trade)
• 0.70 Total

6
Supply-side Issues

• In these models labor-force growth is exogenous.
• Likewise, productivity growth (technical change)
  looms large but is hard to analyze.
• Savings is the other element, and we will try to
  make it at least endogenous in our thinking.
• Remember our implicit assumption of Says Law.

7
Savings

• What determines savings?
• Motives
• Present vs future consumption
• But no specific reason to believe we really trade
  off consumption today against more goodies
  tomorrow
• Need more precise motives!
• Precautionary motive
• Rainy day needs are constant? Surely not huge!

8
Present vs. Future Consumption

• We trade off in financial markets
• S today becomes (1i)S tomorrow (iinterest)
• When i rises real wealth rises we can consume
  the same amount today and more tomorrow!
• From micro theory
• A change in i has an income effect we dont
  need to save as much to make (say) a downpayment
• It also has a substitution effect the better
  price makes us save more.
• Empirically they cancel i doesnt affect S

9
Motives again

• The terms of the tradeoff between today and
  tomorrow doesnt matter much.
• In effect, if we want a price that affects
  savings, then the return on savings isnt it!
• So what motives underlie our savings?

10
Sticky Behavior

• Savings isnt a deliberate choice -- it just
  happens.
• How do we plan our consumption behavior?
• Look at those around us Hence we look backward
• or
• Project current income into the future Hence we
  look backward
• A rise in income thus tends to be saved.
• In particular, growth raises savings rates Due
  to Nobel laureate Franco Modigliani

11
Lifetime or Permanent Income

• The above model assumes we cant see whats
  happening around us, and that non-precautionary
  savings is unplanned
• Alternatively, we deliberately choose to save
  using (rational) expectations about the future
• If we want steady consumption over our lifetime
• But income is low when young and old, then
• We dissave when (i) young or (ii) retired
• We save otherwise. Due to Nobel laureate
  Milton Friedman

12
Income vs. Consumption
Income (rises then falls)
Consumption (steady)
Savings
Retirement...
Dissavings
Dissavings
20
80 (death!)
50
40
30
60
70
13
Implications

• When implemented empirically, both models may
  generate the same equation!
• Savings rise
• When the core savings age bracket is rising as a
  share of the population
• When unexpected increases in income arise
• When (expected) longevity increases
• Private savings fall with social security

14
Other interpretations

• Another approach is to posit target consumption
  over the course of a lifetime
• These might include
• Buying a house
• Funding childrens education
• Paying for their wedding
• Retirement
• In effect, a variation of the lifetime model

15
Advantages of a target

• Individual targets can shift independent of other
  movements (income, etc)
• It helps in particular to model the impact of
  changes in asset prices
• A rise in housing prices boosts savings
• A fall in the stock market boosts savings
• It also seems to fit better surveys of how people
  actually plan their future

16
Japan

• These various approaches successfully predict
  Japans rising savings rate during the high
  growth era of 1955-1973
• The target approach helps us understand why
  savings didnt fall in 1973-74 inflation eroded
  assets
• The target approach helps us understand the
  1990s, too...

17
Next Sources of Growth

• Was growth export-led?
• Did the government do it?
• How about investment?
• How about demand?