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Japan’s High Growth Era Prof. Michael Smitka Fall 2000 Washington and Lee University 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 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) = AKa. L(1 -a) Production Function • Y = f (K, L, tech, etc) = AKa. L(1 -a) • Hence in growth terms: • g. Y = g. A + ag. K + (1 -a)g. L • To implement we just need to know – past or likely future growth rates or values of: • Inputs • factor shares a • productivity growth g. A

Growth Accounting • Contributions, 1961 -71 • 1. 78 Labor • Contributions, 1970 s Growth Accounting • Contributions, 1961 -71 • 1. 78 Labor • Contributions, 1970 s • 0. 68 Labor • +0. 11 Hours • +1. 09 Workers • +0. 58 Educ etc • 2. 57 • 2. 43 • 2. 78 Capital Knowledge Structural • -0. 15 Hours • +0. 68 Workers • +0. 50 Educ etc • 0. 86 • 1. 28 • 0. 42 (agri, EOS, trade) • 9. 56 Total Capital Knowledge Structural (agri, EOS, trade) • 3. 24 Total

Growth Accounting Applied • Sources, 1961 -71 • Sources, 1970 s • Sources, 2000 Growth Accounting Applied • Sources, 1961 -71 • Sources, 1970 s • Sources, 2000 s • 1. 78 Labor • 0. 68 Labor • -0. 20 Labor • Hours +0. 11 • Hours -0. 15 • Hours -0. 20 • Workers +1. 09 • Workers +0. 68 • Workers -0. 10 • Educ etc +0. 58 • Educ etc +0. 50 • Educ etc +0. 10 • 2. 57 Capital • 0. 86 Capital • -0. 10 Capital • 2. 43 Knowledge • 1. 28 Knowledge • 1. 20 Knowledge • 2. 78 Structural • 0. 42 Structural • -0. 20 Structural (agri, EOS, trade) • 9. 56 Total (agri, EOS, trade) • 3. 24 Total (services, trade) • 0. 70 Total

Supply-side Issues • In these models labor-force growth is exogenous. • Likewise, productivity growth 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 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 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 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 “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 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 Income Consumption (steady) (rises then falls) Savings Retirement. . . Dissavings Income vs. Consumption Income Consumption (steady) (rises then falls) Savings Retirement. . . Dissavings 20 30 40 50 60 70 80 (death!)

Implications • When implemented empirically, both models may generate the same equation! • Savings 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 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, 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 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 1990 s, too. . .

Next: Sources of Growth • Was growth export-led? • Did the government do it? Next: Sources of Growth • Was growth export-led? • Did the government do it? • How about investment? • How about demand?