Could Korea face a Japan-like

1
Could Korea face a Japan-like Lost Decade in
the coming years?
Jacob Loree, Scott Stroughan, Yarui Wang, Yuxi Liu
2
Introduction

• From the 1950s to the 1980s Japan was
  considered an economic miracle
• Experienced double digit economic growth
  year-by-year
• Became the second largest economy in a very short
  period of time

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Introduction

• However, in the 1990s, the Japanese economy
  stagnated and began what is known as the Lost
  Decade
• Very little economic growth per year
• Some negative growth years
• This has turned into the Lost Double Decade

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Reasons

• Fundamentally our view is that sustainable high
  level growth in Japan ended after achieving some
  rough level of convergence, but was extended
  through credit and macro policy. Eventually this
  bubble burst leaving Japan with a financial
  crisis, which led to a Lost Decade.

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Reasons

• The reason Japan took so long to recover from its
  crisis and stagnated can be explained by many
  different theories.
• -asset bubbles and zombie banks
• -appreciation of its currency
• - a tightening of monetary policy
• -or more long-term deficiencies such as
  technology or demographics.

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Korea

• Korea is one of the Asian Tigers of economic
  growth
• One of the fastest growing economies from the
  1970s onwards
• One of the largest importers/exporters in the
  world

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Korea

• However, there is growing concern that Korea
  could face a similar stagnation as Japan in the
  1990s
• Asset bubbles, banking issues, etc.
• To investigate the similarities and differences
  in these countries, we can look at economic
  modelling.

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Making Comparisons

• We can compare Solow model of both countries to
  better understand their economic fundamentals and
  determine their projected growth rates.
• We can also compare the gap between expected and
  actual growth rates.
• Check to see if Korea has attained convergence.

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Solow Model

• YAKaLß
• Focuses on savings, population growth, and
  capital per worker
• Steady state equilibrium
• Model forecasts a convergence among all
  countries

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Solow Model

• The most important factor of production, however,
  is technological innovation
• A
• This shifts the Solow curve upwards, allowing the
  steady state to be further out
• Does present-day Korea and 1990s-era Japan have
  significantly different technological innovation
  levels?

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Solow Model

• However, how A is defined differs from
  economist to economist
• Some look at technology as a whole, while some
  use it as a catch-all of everything not
  contained by K and L
• Solow Residual

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Capital and Labour

• The two countries have relatively similar capital
  and labour growth rates.
• Capital growth rates are extremely similar, with
  trends moving in the same direction
• Labour growth rates differ slightly more, but the
  coefficient is so small, that the graph
  overstates the differences

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Differences in Japan and Koreas Solow Model

• Japan (1990-2000)
• logGDP5.6734 0.1856K-0.1684L
• Korea(2000-2010)
• logGDP6.1128 0.2213K -0.0329L
• Very similar Solow models

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Solow Model

• According to the Solow model, we would expect
  Japans GDP to grow by 0.18 per 1 increase in
  capital, and decrease by 0.16 per 1 increase in
  labour
• Did this actually come true with the data we now
  have?

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Japan Results

• From 1990-2000
• GDP grew a total of 7
• Capital grew a total of 0.61
• Labour force grew a total of 5.84
• According to Solow, GDP should have contracted by
  0.82

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Growth Accounting Model

• Using the data from 1990-2000, we know GDP grew
  7, K grew by 0.61, and L grew by 5.84
• Using the Growth Accounting coefficients of
  a0.33 and ß0.66 we see that A grew by 2.94
• Significant portion of growth

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Differences between Japan and Korea

• Obvious difference between theory and reality
  when looking at K and L
• While K and L may be similar for the two
  countries, the more important question is how do
  their demographics, political economy, and
  culture match up?
• These all are a part of A and help determine
  total output of both countries

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Demographics
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Demographics (South Korean Demographic
Pyramid)
From http//www.indexmundi.com/graphs/population-
pyramids/south-korea-population-pyramid-2013.gif
22
Demographics(Japanese Demographic Pyramid)
From http//www.japanfocus.org/data/j.pop.pyramid2
003.gif
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Immigration
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Immigration
"65 respondents were opposed to relax the
restriction in terms of immigration
policy" (Asahi News, 2010)
Japan
Serious Racism
Anti Immigrant Policy
"There are more than one million immigrants
workers in South Korea" (South Korean Ministry
of Justice)
Create a buffer against the low fertility rate
Korea
No Serious Racism
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Technology

• Japan and Korea are very different in how they
  deal with technological innovation
• Japan, almost exclusively, imports new technology
  from the United States
• Korea, however, has started to shift towards
  producing in high-tech industries, to avoid
  reliance from imports

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Technology
Compared with Japan, South Koreas high-tech
manufacturing accounts for larger proportion in
the whole industry .
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Technology
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Technology

• Japan- a middle man economy
• Japan was the single largest consumer of U.S.
  technology, Japans share of U.S. receipts was
  approximately 51 in 1990. 35 in 2000.39 in
  2001.
• ( Japan lacks innovation on the fundamental
  technology)
• Risk Korea is trying to snatch the role of the
  middleman for the U.S. in the U.S.-East Asia
  Supply Chain.

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Conclusion

• Korea wont face the lost decade like Japan.
• Capital and Labour-relatively similar
• Demographics-immigrations(Japan has a stronger
  anti-immigrant bias)
• Technology-Japan imports from US-Korea avoid the
  reliance on US