Japan’s High Growth Era

Prof. Michael Smitka

Fall 2000

Washington and Lee University

Growth Accounting Framework

• Underlying this approach is a production function for the macroeconomy

• Furthermore, as a growth model Say’s Law holds: supply creates its own demand– This is a wholly supply-side model

– In the long run all capacity is utilized – or disappears!

Production Function

• Y = f (K, L, tech, etc)= AKL

• Hence in growth terms:

• gY = gA + gK + ()gL

• To implement we just need to know– past or likely future growth rates or values of:

• Inputs

• factor shares • productivity growth gA

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

• 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

Growth Accounting Applied

• 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

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 Say’s Law.

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!

Present vs. Future Consumption

• We trade off in financial markets– S today becomes (1+i)S tomorrow (i=interest)– 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 don’t 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” doesn’t affect S

Motives again

• The terms of the tradeoff between “today” and “tomorrow” doesn’t matter much.

• In effect, if we want a “price” that affects savings, then the return on savings isn’t it!

• So what motives underlie our savings?

“Sticky Behavior”

• Savings isn’t 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

Lifetime or Permanent Income

• The above model assumes we can’t see what’s 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

Income vs. Consumption

20 80(death!)

5060 704030

Income(rises then falls)

Consumption (steady)

Savings

DissavingsDissavings

Retirement...

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”

Other interpretations

• Another approach is to posit target consumption over the course of a lifetime

• These might include:– Buying a house– Funding children’s education– Paying for their wedding– Retirement

• In effect, a variation of the “lifetime” model

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

Japan• These various approaches successfully predict

Japan’s rising savings rate during the high growth era of 1955-1973

• The “target” approach helps us understand why savings didn’t fall in 1973-74: inflation eroded assets

• The “target” approach helps us understand the 1990s, too...

Next: Sources of Growth

• Was growth export-led?

• Did the government do it?

• How about investment?

• How about demand?