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WITHOUT PERMISSION
OF THE AUTHOR
THE C A U S E S OF
THE
HIGH ECONOMIC GROWTH OFJAPAN
Mitsuo S a i t o Ryoichi Nishimiya
March 1 9 8 5 W-85-15
Working Papers a r e interim r e p o r t s o n work of t h e I n t e r n a t i o n a l I n s t i t u t e f o r Applied Systems Analysis and h a v e r e c e i v e d only lim- i t e d review. Views o r opinions e x p r e s s e d h e r e i n d o not neces- s a r i l y r e p r e s e n t t h o s e of t h e I n s t i t u t e o r of i t s National Member Organizations.
INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria
PREFACE
Many of today's most significant socioeconomic problems, s u c h as slower economic growth, t h e d e c l i n e of some e s t a b l i s h e d i n d u s t r i e s , a n d s h i f t s in p a t t e r n s of f o r e i g n t r a d e , are i n t e r n a t i o n a l or t r a n s n a t i o n a l in n a t u r e . But t h e s e problems manifest themselves in a v a r i e t y of ways; both t h e intensities a n d t h e p e r c e p t i o n s of t h e problems d i f f e r f r o m o n e c o u n t r y to a n o t h e r , so t h a t i n t e r c o u n t r y compara- t i v e a n a l y s e s of r e c e n t h i s t o r i c a l developments are n e c e s s a r y . Through t h e s e a n a l y s e s we a t t e m p t to identify t h e underlying p r o c e s s e s of economic s t r u c t u r a l c h a n g e a n d f o r m u l a t e useful h y p o t h e s e s concerning f u t u r e developments. The understanding of t h e s e p r o c e s s e s a n d f u t u r e p r o s p e c t s p r o v i d e s t h e f o c u s f o r IIASAas p r o j e c t o n Comparative Analysis of Economic S t r u c t u r e a n d Growth.
O u r r e s e a r c h c o n c e n t r a t e s p r i m a r i l y o n t h e empirical a n a l y s i s of i n t e r r e - gional a n d i n t e r t e m p o m l economic s t r u c t u r a l c h a n g e , o n t h e s o u r c e s of a n d con- s t r a i n t s o n economic growth, o n problems of a d a p t a t i o n to sudden c h a n g e s , a n d especially o n problems a r i s i n g f r o m changing p a t t e r n s of i n t e r n a t i o n a l t r a d e , r e s o u r c e availability, a n d technology. The p r o j e c t r e l i e s o n IIASA's accumulated e x p e r t i s e in r e l a t e d fields a n d , in p a r t i c u l a r , o n t h e d a t a b a s e s a n d systems of models t h a t h a v e b e e n developed in t h e r e c e n t p a s t .
In t h i s p a p e r , Mitsuo S a i t o a n d Ryoichi Nishimiya p r e s e n t a q u a n t i t a t i v e evaluation of t h e c o n t r i b u t i o n s of v a r i o u s f a c t o r s to J a p a n e s e economic growth o v e r t h e p e r i o d 1962-73. The method a d o p t e d involves simulations using a macroeconometric model. which combines t h e Keynesian t h e o r y of e f f e c t i v e demand with elements of neoclassical growth t h e o r y to d e s c r i b e both s h o r t - t e r m fluctuations a n d long-term t e n d e n c i e s of t h e economy. The a d v a n t a g e s of t h i s new method o v e r t h e t r a d i t i o n a l a p p r o a c h are discussed. According to S a i t o a n d Nishimiya's estimates, t h e c o n t r i b u t i o n of t e c h n i c a l p r o g r e s s to J a p a n e s e economic growth i s l a r g e r t h a n t h a t s u g g e s t e d b y t h e t r a d i t i o n a l method of growth a c c o u n t - ing.
Anatoli Smyshlyaev R o j e c t Leader Comparative Analysis of Economic S t r u c t u r e a n d Growth
THE CAUSES OF THE HIGH ECONOMC GROWTH OF JAPAN
Mitsuo S a i t o a n d Ryoichi Nishimiya
1. INTRODUCTION
This p a p e r r e p o r t s t h e r e s u l t s of a q u a n t i t a t i v e a n a l y s i s c a r r i e d o u t in o r d e r t o identify t h e c a u s e s of J a p a n ' s r a p i d economic growth d u r i n g t h e p e r i o d 1962-73, on t h e b a s i s of simulations using a n e c o n o m e t r i c model. J a p a n enjoyed a p a r t i c u l a r l y high rate of economic growth d u r i n g t h e 1 9 6 0 s , when t h e a v e r a g e annual growth rate of G N P w a s a b o u t 1 0 p e r c e n t . I t i s i m p o r t a n t t o n o t e , however, t h a t t h i s was n o t a "miracle", b u t r a t h e r a n example of a f a i r l y common p a t t e r n of economic growth. In f a c t , economic growth p a t h s of t h i s s o r t h a v e r e c e n t l y b e e n followed by s e v e r a l o t h e r E a s t a n d S o u t h e a s t Asian c o u n t r i e s , s u c h as Hong Kong, S i n g a p o r e , South K o r e a , a n d ~ a i w a n . '
F o r d e t a i l s of t h e p a t t e r n o f hlgh economic g r o w t h i n J a p a n and t h e n e w l y industrialized coun- tries i n E a s t and S o u t h e a s t Asia, see S e c t i o n 1 of t h e companion IIASA Worklng P a p e r (WP-85-16), C l o w t h and Technology: I n t e r d e p e n d e n c e B e t w e e n T a i w a n and Japan, by t h e s a m e a u t h o r s . F r o m t h e v i e w p o i n t of d e v e l o p m e n t s t r a t e g y it may be v e r y i m p o r t a n t t o know t h e c o n t r i b u t i o n of a p a r - t l c u l a r f a c t o r t o t h e g r o w t h r a t e of G N P and a l s o t o i d e n t i f y t h e m o s t c r u c i a l f a c t o r t n high economic g r o w t h .
One well-known t e c h n i q u e f o r evaluating t h e c o n t r i b u t i o n of individual f a c t o r s t o economic growth i s t h e growth accounting method.2 The method w e p r e s e n t h e r e h a s a n a d v a n t a g e o v e r growth accounting in t h a t i t t a k e s i n t o c o n s i d e r a t i o n t h e i n t e r d e p e n d e n c e among growth f a c t o r s , while growth accounting treats t h e s e fac- t o r s as mutually independent. In addition. o u r method e n a b l e s u s t o examine t h e feasibility of a s p e c i f i c growth p a t h from t h e viewpoint of government a n d e x t e r n a l d e f i c i t s , while growth accounting d o e s not.
The main findings of o u r s t u d y may b e summarized as follows. A o n e - p e r c e n t d e c r e a s e in t h e rate of t e c h n i c a l p r o g r e s s of t h e labor-augmenting t y p e , in t h e growth rate of t h e l a b o r f o r c e a n d population, a n d in t h e rate of c a p i t a l accumula- tion would h i s t o r i c a l l y h a v e r e s u l t e d in r e d u c t i o n s of 0.74 p e r c e n t , 2.35 p e r c e n t , a n d 0.24 p e r c e n t , r e s p e c t i v e l y , in t h e growth rate of r e a l GNP a c c o r d i n g t o o u r calculations; t h e c o r r e s p o n d i n g estimates d e r i v e d f r o m growth accounting are 0.56 p e r c e n t , 0.64 p e r c e n t , a n d 0.36 p e r c e n t , r e s p e c t i v e l y . According to o u r simula- tions, t h e r e l a t i v e c o n t r i b u t i o n s of t e c h n i c a l p r o g r e s s , l a b o r f o r c e , a n d c a p i t a l accumulation t o t h e t o t a l a v e r a g e growth rate of real GNP are 53.5, 23.3, a n d 23.2 p e r c e n t . r e s p e c t i v e l y , while t h e y a r e found t o b e 49.7, 8.2, a n d 42.1 p e r c e n t , r e s p e c t i v e l y , using growth accounting.
In S e c t i o n 2 t h e conventional growth accounting method i s b r i e f l y reviewed a n d t h e c o n t r i b u t i o n s of individual growth f a c t o r s t o t h e GNP growth rate a r e cal- c u l a t e d using t h i s method f o r both demand a n d supply accounting schemes. S e c t i o n 3 e x p l a i n s t h e o u t l i n e of t h e model. S e c t i o n s 4 a n d 5 t h e n p r e s e n t e s t i m a t e s f o r t h e c o n t r i b u t i o n s t o GNP growth rate of demand a n d supply f a c t o r s , r e s p e c t i v e l y , b a s e d o n simulations using t h e e c o n o m e t r i c model of J a p a n . In S e c t i o n 6 w e exam- i n e w h e t h e r government o r t r a d e - b a l a n c e d e f i c i t s would h a v e p l a c e d a n y o b s t a c l e s in t h e way of t h e growth p a t h s d e s c r i b e d in t h e p r e c e d i n g s e c t i o n s . Our s t u d y indi- cates t h a t a high rate of t e c h n i c a l p r o g r e s s i s of e x t r e m e importance among t h e v a r i o u s f a c t o r s c o n t r i b u t i n g t o economic growth.
'
S e e E.F. Denison. The Sourms of Economic Growth i n t h e Lrnfted States a n d the A l t e r n a t i v e s Be- fire US (New York: Committee f o r Economic Development, 1962), and E.F. Denison and W.K. Chung, h Japan's Economy Grew.% f i s t (Washington, DC: The B r o o k i n g s I n s t i t u t i o n , 1976).2.
THE GROWTH ACCOUNTING METHOD
The c o n t r i b u t i o n of t h e growth of individual f a c t o r s t o t h e t o t a l growth rate of GNP h a s f r e q u e n t l y b e e n c a l c u l a t e d using t h e growth accounting method f o r both demand a n d supply f a c t o r s . Let u s f i r s t a p p l y t h i s method to t h e economic growth of J a p a n o v e r t h e p e r i o d 1962-73. The components of GNP o n t h e demand or e x p e n d i t u r e s i d e s a t i s f y t h e following accounting identity f o r e a c h y e a r :
w h e r e
V;,
Ct.
I t , G t , Xt , a n d Mt are, r e s p e c t i v e l y , GNP. p r i v a t e consumption, p r i v a t e investment, government e x p e n d i t u r e , e x p o r t s , a n d imports in y e a r t . The f i r s t d i f f e r e n c e of equation (1) gives:w h e r e AVt
=
Vt-
Vt etc. Dividing b o t h s i d e s of t h e equation byV;
yields:w h e r e c
=
C tV;
etc. Equation (3) shows t h a t t h e growth rate of GNP is t h e weighted sum of t h e growth rates of e a c h demand component, a n d t h u s t h a t e a c h t e r m of t h e right-hand s i d e of e q u a t i o n (3) may b e i n t e r p r e t e d as t h e c o n t r i b u t i o n of a n individual demand f a c t o r to t h e t o t a l growth rate of GNP. This method will b e e x t e n d e d to t h e s e p a r a t i o n of t h e components of t h e growth rate o v e r a l o n g e r p e r i o d , in which t h e growth rates of equation (3) may b e t h e a v e r a g e growth rates f o r t h e r e l e v a n t p e r i o d , a n d c , i , etc., may b e e v a l u a t e d as a v e r a g e s f o r t h e whole p e r i o d . Table 1 p r e s e n t s t h e r e s u l t s of applying s u c h a method to t h e economic growth p a t h followed by J a p a n o v e r t h e p e r i o d 1962-73; columns ( I ) , (2), a n d (3) show, r e s p e c t i v e l y , t h e o b s e r v e d a v e r a g e growth rate of e a c h demand f a c t o r , t h e weight ( c , e t c . ) , a n d t h e c a l c u l a t e d value of e a c h t e r m on t h e right-hand s i d e of equation (3) ( c ( A c t / C t -1), etc.). Column (4) gives t h e r e l a t i v e c o n t r i b u t i o n of e a c h f a c t o r to GNP growth. I t c a n b e s e e n from t h e t a b l e t h a t p r i v a t e consumption demand i s r e s p o n s i b l e f o r t h e h i g h e s t c o n t r i b u t i o n with p r i v a t e investment demand in s e c o n d p l a c e .TABLE
1. Growth accounting f o r t h e demand s i d e , 1962-73 (in p e r c e n t ) .(1 ) (2 ) (3 ) (4 )
G r o w t h rate C o e f f i c i e n t C o n t r i b u t i o n S h a r e of of f a c t o r i n e q . (3) of f a c t o r to (3 )
GNP g r o w t h (1) x (2)
(1) C: P r i v a t e 9.5 0.58 5.51 54.7
c o n s u m p t i o n
(2) 1: P r i v a t e 13.7 0.24 3.29 32.5
i n v e s t m e n t
(3) G: G o v e r n m e n t 8.4 0.21 1.76 17.5
e x p e n d i t u r e
(4)
X:
E x p o r t s 14.5 0.09 1.31 13.0(5) M : I m p o r t s 14.8 -0.12 -1.7'7 -17.7
(6) T o t a l (GNP)
-
1.00 10.10 100.0The c o n t r i b u t i o n of supply-side f a c t o r s to GNP growth i s c a l c u l a t e d using t h e well-known Denison method. The p r o d u c t i o n function f o r GNP may b e w r i t t e n as a function of l a b o r input
N ,
c a p i t a l inputK ,
a n d t h e l e v e l of technology t :Under t h e assumption of homogeneity of d e g r e e o n e , t h e f i r s t - d i f f e r e n c e f o r m of equation (4) i s a p p r o x i m a t e d by:
w h e r e n
= Nt
- l / V t a n d k=
Kt Vt Assuming t h e marginal p r o d u c t i v i t y r e l a t i o n s h i p w e o b t a i n t h e formula:w h e r e wn a n d wk are, r e s p e c t i v e l y , t h e s h a r e s of l a b o r a n d c a p i t a l in t h e t o t a l value of GNP. T h e r e f o r e . t h e growth rate of GNP i s s e p a r a t e d i n t o t h e c o n t r i b u - tions of t h r e e f a c t o r s
-
l a b o r , c a p i t a l , a n d technological p r o g r e s s-
which are r e p r e s e n t e d , r e s p e c t i v e l y , by t h e f i r s t , s e c o n d , a n d t h i r d t e r m s of t h e r i g h t - h a n d s i d e of t h e equation. 3Since Of / Bt i s not d i r e c t l y observable, t h i s p a r t i s calculated a s a residual. i.e., t h e value t h a t i s obtained by s u b t r a c t i n g t h e f i r s t two t e r m s of equation (6) from t h e observed r a t e of growth of CNP.
T a b l e 2 shows t h e r e s u l t s of applying t h i s method t o t h e GNP growth of J a p a n o v e r t h e p e r i o d 1962-73. Note t h a t a b o u t one-half of t h e t o t a l , t e n - p e r c e n t GNP growth rate i s a t t r i b u t e d t o t e c h n i c a l p r o g r e s s . This l a r g e c o n t r i b u t i o n from t e c h n i c a l p r o g r e s s coincides with findings from r e s e a r c h o n a number of o t h e r c o u n t r i e s .
TABLg 2. Growth accounting f o r t h e supply s i d e , 1962-73 (in p e r c e n t ) .
-
( 1 ) ( 2 ) ( 3 ) ( 4 )
Growth rate Coefficient Contribution S h a r e of of f a c t o r in eq. ( 6 ) of f a c t o r t o ( 3 )
(W ) CNP growth
( 1 ) x ( 2 )
( I )
N:
Labor 1.3 0.64 0.8 8.2(2)
K:
Capital 11.8 0.36 4.3 42.1( 3 ) t : Technical 5.0
-
5.0 49.7progress
( 4 )
E
Total (CNP) --
10.1 100.0I t i s t r u e t h a t t h e method of growth accounting o f f e r s a n e a s y and s t r a i g h t f o r - ward way of evaluating t h e c o n t r i b u t i o n s of individual growth f a c t o r s t o t h e o v e r a l l growth rate of GNP. I t must b e emphasized, however, t h a t t h e c a l c u l a t e d r e s u l t s h a v e only limited significance from t h e viewpoint of economic development s t r a t e g i e s . A few examples will d e m o n s t r a t e t h i s v e r y c l e a r l y .
F i r s t , t h e method of growth accounting n e g l e c t s t h e i n t e r d e p e n d e n c e among growth f a c t o r s , a n d i s t h e r e f o r e likely t o lead to u n r e a l i s t i c conclusions r e g a r d i n g development s t r a t e g y . Column (2) of T a b l e 1 s t a t e s t h a t a o n e - p e r c e n t i n c r e a s e in t h e growth rate of government e x p e n d i t u r e will i n c r e a s e t h e growth rate of GNP by 0 . 2 1 p e r c e n t . But i t i s well known t h a t t h e r e e x i s t v e r y s t a b l e r e l a t i o n s h i p s between t h e growth rates of GNP a n d consumption a n d between t h o s e of GNP a n d imports. T h e r e f o r e , t h e e f f e c t of an i n c r e a s e in t h e growth rate of government e x p e n d i t u r e will b e more a c c u r a t e l y e v a l u a t e d by introducing t h e so-called multi- p l i e r e f f e c t i n t o t h e growth accounting ~ c h e m e . ~
Substitution of Act/ Ct-l = u ( A g / and AMt/Ht-l = v (A%/
g - l )
into equation ( 3 ) yields:f i t
+ B- (38)
Gt -1 xt -1
where k = 1/ ( 1 - uc
+
mu). k i s calculated a s 1.61 by substituting estimates for u (0.88) and u (1.10). In t h i s case, a one-percent increase i n investment, government expenditure, and exports would give r i s e t o increases in CNP growth rate of 0.39, 0.34, and 0.15 percent, respectively.S e c o n d , t h e growth accounting f o r t h e demand s i d e i s completely s e p a r a t e f r o m t h a t f o r t h e supply s i d e , t h u s g r e a t l y limiting t h e usefulness f o r policy making of any q u a n t i t a t i v e r e s u l t s . Growth accounting f o r t h e demand s i d e states t h a t a n i n c r e a s e of o n e p e r c e n t in t h e growth rate of government e x p e n d i t u r e will l e a d to a 0 . 2 1 - p e r c e n t i n c r e a s e in t h e growth rate of GNP. If, however, t h e l e v e l of capa- c i t y o u t p u t f a l l s s h o r t of t h e growth p a t h envisaged by such a n e x p a n s i o n a r y pol- icy, t h e a s s o c i a t e d i n c r e a s e in GNP growth rate will n o t b e r e a l i z e d . On t h e o t h e r hand, growth accounting o n t h e supply s i d e states t h a t an i n c r e a s e in t h e rate of t e c h n i c a l p r o g r e s s will l e a d t o t h e same p e r c e n t a g e i n c r e a s e in t h e growth rate of GNP. If, however, t h e l e v e l of e f f e c t i v e demand falls s h o r t of t h e l e v e l of t h e e x p a n d e d c a p a c i t y , t h e e x p e c t e d i n c r e a s e in t h e growth rate of GNP will not materialize in t h e real economy. I t i s a l s o i m p o r t a n t to n o t e t h a t a c h a n g e in a given f a c t o r o n t h e demand s i d e will e f f e c t a c h a n g e in a r e l a t e d f a c t o r o n t h e sup- ply side. F o r example, an i n c r e a s e in t h e growth rate of investment i s d i r e c t l y r e l a t e d to a n i n c r e a s e in t h e growth rate of c a p i t a l s t o c k , by definition.
Third, some i m p o r t a n t o b s t a c l e s to growth are completely n e g l e c t e d by growth accounting. Over t h e p e r i o d 1962-73, balance-f-payment d e f i c i t s c o n s t i t u t e d a n important o b s t a c l e to t h e f a s t e r growth of GNP. T h e r e f o r e , in t h e real economy an i n c r e a s e of o n e p e r c e n t i n t h e growth rate of government e x p e n d i t u r e would actu- ally n o t give r i s e to a n i n c r e a s e of 0.21 p e r c e n t in GNP, if t h e e x p a n s i o n a r y policy c a u s e d t h e balance-f-payment position to d e t e r i o r a t e beyond a c e r t a i n point.
A l s o , i t should b e r e m e m b e r e d t h a t , a f t e r t h e oil c r i s i s , government d e f i c i t s imposed a s e r i o u s b r a k e o n e x p a n s i o n a r y policies, which w a s n o t t h e case b e f o r e 1973.
The method we a d o p t h e r e to c a l c u l a t e t h e c o n t r i b u t i o n of e a c h f a c t o r to t h e growth r a t e of GNP i s b a s e d on simulations using a n econometric model of t h e J a p a n e s e economy. More specifically, w e f i r s t simulate t h e h i s t o r i c a l p a t h of t h e J a p a n e s e economy o v e r t h e p e r i o d 1961-79. W e t h e n simulate a h y p o t h e t i c a l
growth p a t h within which t h e growth r a t e of a given f a c t o r i s c h a n g e d by o n e p e r - c e n t , a n d c a l c u l a t e t h e c o n t r i b u t i o n of t h e f a c t o r t o t h e growth rate of G N P by comparing t h e h y p o t h e t i c a l p a t h with t h e o r i g i n a l one. The c a l c u l a t e d values of e a c h f a c t o r for b o t h t h e demand a n d supply s i d e s s a t i s f y s t r u c t u r a l equations, such as t h e consumption functions, t h e investment function, a n d t h e import func- tions, and are c o n s t r a i n e d by t h e production function; in o t h e r words, f e e d b a c k e f f e c t s among t h e f a c t o r s are comprehensively t a k e n i n t o a c c o u n t . T h e r e f o r e , o u r method is free from t h e f i r s t t w o d r a w b a c k s of t h e growth accounting technique.
In addition, t h e simulated p a t h i s examined t o find o u t w h e t h e r i t violates t h e res- t r i c t i o n s o n e i t h e r government o r balance-of-payment deficits. If i t d o e s , t h e p a t h i s d i s c a r d e d as a n u n r e a l i s t i c v a r i a n t . In t h i s way, o u r method a l s o avoids t h e t h i r d major d r a w b a c k of growth accounting.
3. THE O U T L M g OF THE MODEL
W e begin by summarizing t h e s p e c i a l f e a t u r e s of t h e model, which i s essen- tially a n a n n u a l a g g r e g a t i v e model of t h e Keynesian type. with a sample p e r i o d of 1961-79. The estimated equations a n d v a r i a b l e s of t h e model are l i s t e d in t h e
~ ~ ~ e n d i x . ' In g e n e r a l , estimations are p e r f o r m e d using t h e o r d i n a r y l e a s t - s q u a r e s method.
3
i s t h e m e a s u r e of goodness of f i t a d j u s t e d f o r d e g r e e s of f r e e d o m a n d D.W. i s t h e Durbin-Watson s t a t i s t i c . The f i g u r e in p a r e n t h e s e s below e a c h r e g r e s - sion c o e f f i c i e n t i s t h e c o r r e s p o n d i n g t-value. Some of t h e equations are estimated by t h e Cochrane-Orcutt i t e r a t i v e method, w h e r e p i s t h e s e r i a l c o r r e l a t i o n coeffi- c i e n t of f i r s t o r d e r in e r r o r terms.The f i r s t s p e c i a l c h a r a c t e r i s t i c of t h e model i s t h e d i s a g g r e g a t i o n of final demand. S i n c e t h e e n e r g y problem i s o n e of t h e most s e r i o u s facing t h e J a p a n e s e economy, final demand i s d i s a g g r e g a t e d so as t o treat t h e e n e r g y question in more d e p t h . T h e r e a r e f o u r consumption items, namely foods, a u t o s a n d a u t o f u e l , h e a t - ing fuel, a n d o t h e r s ; i m p o r t s are d i s a g g r e g a t e d i n t o f u e l s a n d nonfuels.
A detailed explanation o f t h e model and r e s u l t s o f t e s t s o f i t s w o r k a b i l i t y a r e presented in a s e p a r a t e paper, M . S a i t o and T . Oono, An E n e r g y Model of t h e J a p a n e s e Economy, l962-2979.
The s e c o n d f e a t u r e of t h e model is t h e a p p l i c a t i o n of t h e input-output t e c h - nique to t h e p r i c e equations. I n d u s t r y a s a whole i s d i s a g g r e g a t e d i n t o six s e p a r a t e industries: (1) p r i m a r y , excluding c r u d e oil, (2) c r u d e oil, (3) manufac- t u r i n g , excluding petroleum a n d c o a l p r o d u c t s , (4) petroleum a n d c o a l p r o d u c t s , (5) t e r t i a r y , a n d (6) e l e c t r i c i t y a n d gas. The p r i c e of e a c h i n d u s t r y i s explained mainly in t e r m s of a c o s t v a r i a b l e f o r t h e i n d u s t r y c o n c e r n e d , which i s defined a s t h e sum of t h e m a t e r i a l , l a b o r , a n d c a p i t a l c o s t s . Material c o s t s a r e c a l c u l a t e d as t h e sum of t h e p r o d u c t s of m a t e r i a l input c o e f f i c i e n t s a n d t h e c o r r e s p o n d i n g p r i c e s , l a b o r c o s t i s t h e p r o d u c t of t h e l a b o r input c o e f f i c i e n t a n d wage, a n d capi- tal c o s t i s t h e p r o d u c t of t h e d e p r e c i a t i o n r a t i o a n d t h e r e n t a l p r i c e of c a p i t a l . This s e t u p e n a b l e s u s t o d e s c r i b e t h e i n t e r d e p e n d e n c e between t h e p r i c e s of dif- f e r e n t i n d u s t r i e s a n d to trace o u t t h e e f f e c t s of i m p o r t p r i c e s , a n d p a r t i c u l a r l y t h e oil p r i c e , on t h e p r i c e configuration of t h e whole economy. The wage i s given by a v e r s i o n of t h e Phillips c u r v e .
The t h i r d c h a r a c t e r i s t i c of t h e model i s t h a t t h e supply s i d e of t h e economy is r e p r e s e n t e d by a neoclassical production function of t h e two-level. CES type.6 Within t h e framework of t h i s p r o d u c t i o n function and c o s t minimization o n t h e p a r t of t h e firms, t h e m a t e r i a l input coefficients of e a c h i n d u s t r y are f l e x i b l e with r e s p e c t to t h e r e l a t i v e p r i c e s of o u t p u t s a n d inputs; a n d t h e d e g r e e of flexibility, i.e. t h e e l a s t i c i t y of substitution, c a n b e estimated from t h e time s e r i e s of input coefficients a n d r e l a t i v e p r i c e s . The e s t i m a t e of t h e e l a s t i c i t y of s u b s t i t u t i o n among m a t e r i a l i n p u t s is c l o s e to unity f o r i n d u s t r i e s 1 (1.161), 4 (0.900), a n d 6 (1.094). while i t is 1.346 a n d 0.627 f o r i n d u s t r i e s 3 a n d 5 , r e s p e c t i v e l y .
The e l a s t i c i t y of s u b s t i t u t i o n f o r value a d d e d is estimated via a n a g g r e g a t e production function f o r t o t a l supply, i.e. GNP plus imports. More specifically, t h e o u t p u t i s t o t a l supply, while t h e inputs a r e l a b o r , c a p i t a l , oil imports, a n d o t h e r imports. The e l a s t i c i t y of substitution i s estimated as 0.36. Technical p r o g r e s s of a labor-augmenting t y p e is allowed f o r by t h e t e r m T t , i.e.,
K. Seto, A Two-Level CES Production Function, R e v i e w of Economic SYudies. Vol. 3 4 (2), 1967, pp.
201-218.
where t
=
time t r e n d a n d=
g r o s s fixed investment. If t h e levels of IF a r e k e p t unchanged, T will grow a t t h e rate ofX
p e r c e n t p e r y e a r . But if t h e levels of IF in r e c e n t y e a r s are h i g h e r t h a n t h o s e in p a s t y e a r s , t h e rate of change of T will b e a c c e l e r a t e d , implying t h a t t h e newer vintage of c a p i t a l s t o c k r a i s e s t h e a v e r a g e level of technology. The estimates of t h e rate of technical p r o g r e s s , A, are 9.0 and 3.0 p e r c e n t p e r y e a r for t h e p e r i o d s b e f o r e a n d a f t e r t h e oil c r i s i s , r e s p e c - tively. These estimates a r e obtained from t h e marginal productivity r e l a t i o n s h i p between t h e input r e q u i r e m e n t p e r unit o u t p u t and t h e r e l a t i v e p r i c e s . Thus, t h e equation r e l a t e d to l a b o r input will determine t h e l a b o r input coefficient of indus- t r y as a whole, o r i t s r e c i p r o c a l , l a b o r productivity. The l a b o r input coefficient of e a c h individual industry i s r e g r e s s e d on t h a t of industry as a whole u n d e r t h e assumption t h a t a s t a b l e r e l a t i o n s h i p e x i s t s between t h e t w o .The cost-minimization equation f o r t h e c a p i t a l input of industry as a whole gives u s a formula f o r t h e quantity of c a p i t a l r e q u i r e d . Together with e x p e c t e d profits, t h i s will determine o b s e r v e d levels of investment. Finally, t h e cost- minimization equation f o r fuel imports will a l s o d e t e r m i n e t h e quantity of t h e s e imports.
4. THE CONTRIBUTION OF DEXAND FACTORS TO ECONOMC PERFORMANCE The demand components considered are p r i v a t e consumption, p r i v a t e invest- ment. government e x p e n d i t u r e , e x p o r t s . a n d ( t h e negative o f ) imports. A s w e men- tioned in t h e p r e v i o u s section, v e r y s t a b l e r e l a t i o n s h i p s e x i s t between GNP and p r i v a t e consumption and between GNP and imports. T h e r e f o r e , w e will c o n c e n t r a t e on p r i v a t e investment, government e x p e n d i t u r e , a n d e x p o r t s as t h e main demand f a c t o r s affecting t h e growth of G N P . ~
Private investment and exports are endogenous variables in the model. But, since they are much more affected by exogenous factors than are private consumption and imports, the contribution of such exogenous f a c t o r s t o economic growth will be evaluated in what follows.
4.1. Government Expenditure
Both consumption (CG) a n d investment (IG) e x p e n d i t u r e s of government in c o n s t a n t p r i c e s a r e exogenous v a r i a b l e s in o u r model. Thus t h e c o n t r i b u t i o n t o t h e growth r a t e of GNP of a n i n c r e a s e in government e x p e n d i t u r e will b e c a l c u l a t e d by simulating a h y p o t h e t i c a l p a t h in which t h e a v e r a g e growth rates of b o t h CG a n d IG are o n e p e r c e n t h i g h e r t h a n t h e i r a c t u a l values. The r e s u l t s a r e given in Table 3, in which column (4) p r e s e n t s t h e d i f f e r e n c e in growth rates between t h e c o n t r o l solution (column (2)) a n d t h e i n c r e a s e d government e x p e n d i t u r e solution (column (3)). I t c a n b e s e e n t h a t a o n e - p e r c e n t r i s e in t h e growth r a t e of CG a n d IG will give r i s e t o a 0 . 3 3 - p e r c e n t r i s e in t h e growth rate of GNP. This f i g u r e is h i g h e r t h a n t h e 0 . 2 1 p e r c e n t (column (2) of Table 1) quoted e a r l i e r , b u t v e r y close to t h e 0.34 p e r c e n t value of Footnote 4, which is o b t a i n e d by t a k i n g into a c c o u n t t h e multiplier e f f e c t of government e x p e n d i t u r e s . Also, t h e i n c r e a s e of 0.33 p e r c e n t in t h e growth rate of GNP is accompanied by i n c r e a s e s of 0.15. 0.16, a n d 0.14 p e r c e n t in t h e inflation rates f o r t h e GNP d e f l a t o r , t h e consumption def- l a t o r , a n d t h e growth rate of employment, r e s p e c t i v e l y .
TABLE
3. Contribution of government e x p e n d i t u r e t o economic p e r f o r m a n c e , 1962-73 (in p e r c e n t p e r annum).- -
(1) (2) (3) (4)
Observed Control I n c r e a s e d (3)
-
(2)solution government expend1 t u r e CG : Government consumption
IG : Government investment I/: GNP
C: P r i v a t e consumption p: Fixed lnvestment X: E x p o r t s
M: Imports
P:
GNP d e f l a t o rPC:
Consumption d e f l a t o r N: P e r s o n s engaged W: Wage rate--
I t is important to n o t e t h a t t h e i n c r e a s e of 0 . 1 4 p e r c e n t in t h e a v e r a g e growth rate of employment implies a n i n c r e a s e in employment of 1 . 5 5 (a 0.14 X 11 y e a r s ) p e r c e n t , o r some 784 thousand p e r s o n s in 1 9 7 3 , a n d t h i s is essentially impossible
s i n c e t h e o b s e r v e d number of unemployed in 1 9 7 3 w a s only 670 thousand persons.' This s u g g e s t s t h a t i t may b e v e r y difficult to r a i s e t h e a v e r a g e rate of GNP growth by continuously expanding government e x p e n d i t u r e o v e r a f a i r l y long p e r i o d , of s a y t e n y e a r s , unless a l a r g e pool of unemployment e x i s t s at t h e s t a r t i n g point. I t must b e added, however, t h a t t h i s r e s u l t d o e s not c o n t r a d i c t t h e s h o r t - r u n e f f e c t i v e n e s s of adjustments in t h e level o f government e x p e n d i t u r e . Another simulation shows t h a t a o n e - p e r c e n t i n c r e a s e in t h e growth rate of GNP c a u s e d by a n i n c r e a s e in government e x p e n d i t u r e would give r i s e t o a n i n c r e a s e of 0.18 p e r - c e n t o r 83 thousand p e r s o n s in employment in t h e first y e a r .
4.2. Exports
In o u r model commodity e x p o r t s are r e p r e s e n t e d by a n endogenous v a r i a b l e or a log-linear function of t h e world t r a d e index a n d r e l a t i v e p r i c e s . If w e a d d t o t h e e x p o r t function a t r e n d v a r i a b l e t h a t r a i s e s commodity e x p o r t s by o n e p e r c e n t e v e r y y e a r , w e c a n c a l c u l a t e t h e c o n t r i b u t i o n of e x p o r t demand t o t h e growth rate of GNP. Column (2) of T a b l e 4 p r e s e n t s t h e r e s u l t s of s u c h a c a l c ~ l a t i o n . ~
A s shown in Column (3) of t h e t a b l e , t h e a v e r a g e growth r a t e s of e x p o r t s and GNP in t h i s simulation e x c e e d t h o s e of t h e c o n t r o l solution by 0.70 a n d 0.11 p e r - c e n t , respectively.1° T h e r e f o r e . a o n e - p e r c e n t i n c r e a s e in t h e growth rate of e x p o r t s would give r i s e to a n i n c r e a s e of 0.15 (= 0.11/0.70) p e r c e n t in t h e growth rate of GNP, which i s h i g h e r t h a n t h e 0.09 p e r c e n t of Column (2) of T a b l e 1. b u t p r a c t i c a l l y t h e same as t h e f i g u r e in Footnote 4. Another simulation shows t h a t , if a o n e - p e r c e n t i n c r e a s e in t h e growth rate of GNP i s b r o u g h t a b o u t solely by a n i n c r e a s e in t h e growth rate of e x p o r t s , t h e r e q u i r e d i n c r e a s e in t h e a v e r a g e annual growth rate of employment would b e 0.67 p e r c e n t , which is again impossible f o r t h e same r e a s o n as s t a t e d above.
'
Another simulation, based upon a 3-percent increase in the growth rate of government expendi- ture, indicates that the growth r a t e s of CNP and employment would be increased by 1.06 and 0.45 percent, respectively, implying an approximately llnear relationship between cause and e f f e c t .This assumes that the stochastic term of the export function has a systematic increasing trend.
The final increase of 0.70 percent i s lower than the s h i f t of 1.00 percent in the export function.
This i s because the increase in exports will lead t o an increase in CNP and a r i s e in the export price and the latter wlll tend to make exports decrease.
TABLE 4. Contribution of e x p o r t s a n d p r i v a t e investment t o economic p e r f o r - mance, 1962-73 (in p e r c e n t p e r annum).
- -- -
-- - - - - -. - -
(1) (2) (3) (4 ) (5)
Control Increased (2)
-
(I) Increased (4)-
(1) solution e x m r t s lnvestrnent(1) Exogenous 0.00
e x p o r t r lse
(2) Exogenous 0.00
Investment r i s e
(3) GNP 9.66
(4) C: P r l v a t e 8.87 consumption
(5) F : P r l v a t e 12.68 lnvestrnent
(6)
X:
Exports 14.24(7)
M :
h p o r t s 15.24 (8)P:
GNP d e f l a t o r 6.26 (9) PC: Consumption 6.47d e f l a t o r
(10)
N:
Persons engaged 0.93 (11) W : Wage r a t e 14.414.3. tnvestment
Although p r i v a t e f i x e d investment i s endogenously determined by t h e equation explaining t h e r a t i o of new investment t o beginning-of-year c a p i t a l s t o c k , t h e addi- tion of a c o n s t a n t t e r m 0 . 0 1 t o t h e right-hand s i d e of t h e equation e n a b l e s us t o c a l c u l a t e t h e e f f e c t o n economic p e r f o r m a n c e of a n autonomous i n c r e a s e in t h e rate of c a p i t a l accumulation.'' The r e s u l t s of t h i s simulation are shown in column (4) of Table 4. An i n c r e a s e of o n e p e r c e n t in t h e rate of c a p i t a l accumulation would l e a d t o i n c r e a s e s of 0.10, 0.25, a n d 0.10 p e r c e n t in t h e growth rates of GNP, investment, a n d employment, r e s p e c t i v e l y . A n o t h e r simulation with t h e addition of a c o n s t a n t t e r m 0 . 0 3 3 shows t h a t a o n e - p e r c e n t i n c r e a s e in t h e growth rate of investment would l e a d t o a n i n c r e a s e of 0 . 3 9 p e r c e n t in t h e GNP growth r a t e , which i s p r a c t i c a l l y t h e same as t h e f i g u r e in Footnote 4. Again, t h e 0.39-percent i n c r e a s e in GNP growth rate must b e accompanied by a n i n c r e a s e of 0.35 p e r c e n t in t h e a v e r a g e growth rate of employment, which i s c l e a r l y impossible.
''
This assumes that the stochastic term of the investment function has a systematic p o s i t i v e value rather than zero.Our a n a l y s i s of t h e c o n t r i b u t i o n of demand f a c t o r s t o t h e growth rate of GNP may b e summarized as follows:
(1) The c o n t r i b u t i o n s of e a c h demand f a c t o r t o t h e growth r a t e of GNP a r e much l a r g e r t h a n t h e f i g u r e s d e r i v e d f r o m growth accounting in T a b l e 1, a n d are v e r y c l o s e t o t h e values of F o o t n o t e 4, which a r e obtained by taking t h e mul- t i p l i e r e f f e c t into a c c o u n t .
(2) I t i s almost impossible to r a i s e t h e a v e r a g e growth rate of GNP in e l e v e n y e a r s by o n e p e r c e n t p e r y e a r t h r o u g h a sustained i n c r e a s e in t h e demand f a c t o r a l o n e , s i n c e t h e l a b o r s h o r t a g e s implied by s u c h a growth p a t h would b e v e r y g r e a t .
5. THE CONTRIEUTION O F S U P P L Y FACTORS TO ECONOMIC PERFORMANCE
5.1. T e c h n i c a l Progress
L e t u s begin by evaluating t h e c o n t r i b u t i o n of t e c h n i c a l p r o g r e s s to J a p a n e s e economic growth. In o u r model, t e c h n i c a l p r o g r e s s i s r e p r e s e n t e d by a coefficient h in t h e formula f o r T t , a n d t h e estimated value of h f o r 1962-73 i s 9 p e r c e n t p e r y e a r . T a b l e 5 p r e s e n t s t h e r e s u l t s of a simulation in which t h e value of h is set at 0.08, o t h e r exogenous v a r i a b l e s being k e p t unchanged. I t c a n b e s e e n f r o m column (3) of t h e t a b l e t h a t a d e c r e a s e of o n e p e r c e n t in h will r e d u c e t h e growth rate of GNP by 0.45 p e r c e n t , while i t will i n c r e a s e t h e growth rate of employment by 0.12 p e r c e n t a n d t h e inflation rate of t h e p r i v a t e consumption d e f l a t o r by 0.72 p e r c e n t . These r e s u l t s may b e t r a c e d o u t in o u r model as follows. The d e c r e a s e in t h e rate of t e c h n i c a l p r o g r e s s will l e a d t o a d e c r e a s e in e x p e c t e d p r o f i t s , d u e to a r i s e in unit l a b o r c o s t , a n d t h u s t o a f a l l in p r i v a t e investment. The f a l l in investment demand will l e a d t o a f a l l in t h e l e v e l of e f f e c t i v e demand a n d t h e r e f o r e to a decline in GNP." The decline in GNP will r e d u c e t h e level of employment, while t h e slowdown of t e c h n i c a l p r o g r e s s will i n c r e a s e t h e quantity of l a b o r r e q u i r e d t o meet a given l e v e l of e f f e c t i v e demand; t h e simulation r e s u l t s show t h a t t h e l a t t e r e f f e c t will predominate. Finally, t h e r i s e in unit l a b o r c o s t will i n c r e a s e t h e p r i c e s of
The f a l l i n i n v e s t m e n t w i l l a l s o lead t o a slowdown i n t h e growth r a t e o f T t . ( See t h e d e f i n i t i o n o f Tt i n S e c t i o n 3 . )
individual i n d u s t r i e s a n d t h e r e b y r a i s e t h e d e f l a t o r s of t h e individual components of G N P .
TABLE
5. E f f e c t s o n economic p e r f o r m a n c e of a c h a n g e in t h e rate of t e c h n i c a l p r o g r e s s , 1962-73 (in p e r c e n t p e r annum).(1) (2) (3) (4) (5 )
Control S l o w e r t e c h . (2)
-
(1) S l o w e r t e c h . (4)-
(1)s o l u t i o n p r o g r e s s p r o g r e s s
(1)
A:
Rate o f 9.00 8.00 -1.00 8.00 -1.00t e c h n i c a l p r o g r e s s
(2) CG: Government 5.39 5.39 0.00 4.46 -0.93
consumption
(3) IG: Government 12.75 12.75 0.00 11.82 -0.93
i n v e s t m e n t
(4)
V:
GNP 9.66 9.22 -0.45 8.92 -0.74(5) C: P r i v a t e 8.87 8.51 -0.36 8.37 -0.50 consumption
(6)
IF:
P r i v a t e 12.68 11.93 -0.75 11.70 -0.98Investment
(7)
X:
E x p o r t s 14.24 13.37 -0.87 13.46 -0.78(8) M : Imports 15.24 14.96 -0.28 14.72 -0.51
(9) P : GNP d e f l a t o r 6.26 7.04 +0.78 6.90 +0.64
(10) PC: Consumptlon 6.47 7.19 +0.72 7.04 +0.57 d e f l a t o r
(11)
N:
P e r s o n s e n g a g e d 0.93 1.05 +0.12 0.92 -0.01 (12)W :
Wage rate 14.41 14.69 +0.28 14.51 -0.10I t i s i m p o r t a n t to n o t e t h a t t h e i n c r e a s e of 0.12 p e r c e n t in t h e a n n u a l g r o w t h rate of employment implies a n i n c r e a s e in employment of 1.36 p e r c e n t a f t e r e l e v e n y e a r s o r a n i n c r e a s e of 690 t h o u s a n d p e r s o n s in 1973 a l o n e , a n d t h i s i s impossible b e c a u s e t h e o b s e r v e d number of unemployed in 1973 w a s only 670 t h o u s a n d p e r - s o n s . T h e r e f o r e i t i s c l e a r t h a t a n economy with a slower rate of t e c h n i c a l p r o - g r e s s would n o t h a v e b e e n a b l e to meet t h e same l e v e l of e f f e c t i v e demand as t h a t a c t u a l l y o b s e r v e d in 1962-73 a n d t h a t , f o r example, i t would h a v e b e e n n e c e s s a r y to slow down t h e growth rate of g o v e r n m e n t e x p e n d i t u r e so as to avoid e x t r e m e e x c e s s demand in t h e l a b o r m a r k e t , o v e r h e a t i n g c a u s e d by i n f l a t i o n a r y p r e s s u r e s , a n d so on. S u p p o s e t h a t government e x p e n d i t u r e w e r e slowed down so as to k e e p t h e l a b o r m a r k e t as t i g h t as i t was in t h e o b s e r v e d s i t u a t i o n ( o r in t h e c o n t r o l solu- tion).13 The r e s u l t of s u c h a simulation i s shown in columns (4) a n d (5) of Table 5.
l 3 The Japanese economy moved Prom a position of labor abundance t o one of labor shortage around 1955. The rate of unemployment over the period 1962-73 was between 1.36 and 1.40 percent, and further mobilization of any substantial amount of labor would have been v e r y difficult. Therefore.
in what follows the observed level of employment will be regarded a s a standard level of Pull em- ployment.
I t may b e s e e n from t h e t a b l e t h a t a one-percent slowdown in t e c h n i c a l p r o g r e s s will, in e f f e c t , l e a d to a d e c r e a s e of 0.74 p e r c e n t in G N P growth r a t e , a n d t o i n c r e a s e s of 0.57, 0.64, a n d 0.10 p e r c e n t in t h e growth r a t e s of t h e consumption d e f l a t o r , t h e G N P d e f l a t o r , a n d t h e wage r a t e , r e s p e c t i v e l y . A o n e - p e r c e n t d e c r e a s e in t h e rate of t e c h n i c a l p r o g r e s s of t h e labor-augmenting t y p e c o r r e s p o n d s to a 0.56- (= 5.0/9.0) p e r c e n t d e c r e a s e in t h e r a t e of t e c h n i c a l pro- g r e s s a c c o r d i n g t o growth a c c o u n t i n g , which would lead t o a r e d u c t i o n of t h e same p e r c e n t a g e in G N P growth r a t e . I t i s i n t e r e s t i n g t o n o t e t h a t , while a slowdown of o n e p e r c e n t in t h e rate of labor-augmenting t e c h n i c a l c h a n g e means a loss of 0.56 p e r c e n t in t h e G N P growth rate a c c o r d i n g t o growth accounting, t h e same slowdown would imply a l o s s of 0.74 p e r c e n t using o u r a p p r o a c h . Our method s u g g e s t s t h a t a v e r y high rate of t e c h n i c a l p r o g r e s s explains t h e g r e a t e r p a r t of t h e high rate of G N P growth o b s e r v e d in J a p a n d u r i n g t h e 1960s. In f a c t , o n e simulation indicates t h a t , if t h e rate of t e c h n i c a l p r o g r e s s were t o h a v e b e e n z e r o a n d employment had b e e n k e p t at t h e l e v e l of t h e c o n t r o l solution by r e d u c i n g government e x p e n d i t u r e , t h e a v e r a g e annual growth rate of G N P a n d t h e a v e r a g e a n n u a l inflation rate of t h e consumption d e f l a t o r would h a v e been 3.40 and 1 1 . 7 3 p e r c e n t , r e s p e c t i v e l y .
5.2. Population and Labor Force
W e now c o n s i d e r t h e c o n t r i b u t i o n of t h e growth rate of population t o t h e growth rate of J a p a n ' s G N P . Table 6 p r e s e n t s t h e r e s u l t s of a hypothetical simu- lation in which t h e growth rates of both population a n d l a b o r f o r c e a r e i n c r e a s e d by o n e p e r c e n t from t h e i r a c t u a l values, o t h e r exogenous v a r i a b l e s being k e p t unchanged. Column (3) of t h e t a b l e shows t h e d i f f e r e n c e between t h e c o n t r o l a n d hypothetical solutions. I t c a n b e s e e n t h a t a o n e - p e r c e n t i n c r e a s e in population would yield a n i n c r e a s e of 0 . 2 7 p e r c e n t in t h e consumption growth r a t e a n d a n i n c r e a s e of 0.36 p e r c e n t i n t h e G N P growth rate. On t h e o t h e r hand, a n i n c r e a s e of 0.16 p e r c e n t i n t h e employment growth rate i s c o n s i d e r a b l y smaller t h a n t h e i n c r e a s e of o n e p e r c e n t i n l a b o r - f o r c e growth rate. A s a r e s u l t , t h e growth r a t e s of wage a n d t h u s t h e consumption d e f l a t o r would b e r e d u c e d by 1.14 a n d 0.82 p e r c e n t , r e s p e c t i v e l y .
TABLE 6. E f f e c t s on economic p e r f o r m a n c e of a c h a n g e in l a b o r f o r c e , 1962-73 (in p e r c e n t p e r annum).
--- --
(1 (2) (3 (4) (5
Control Increased (2)
-
(1) Increased (4)-
(1)solution labor Porce labor Porce
and and
population population
(1) W P : Population 1.25 2.25
+
1.00 2.25(2) p: Labor f o r c e 1.31 2.31 +1.00 2.31
(3) CG: Government 5.39 5.39 0.00 10.79
consumption
(4) IG: Government 12.75 12.75 0.00 18.15 investment
)
E
CNP 9.66 10.02 +0.36 12.01(6) C: P r i v a t e 8.87 9.14 +0.27 10.03 consumption
(7) IF: P r i v a t e 12.68 13.14 +0.46 14.85
investment
(8)
X:
Exports 14.24 15.13 +0.89 14.66(9) hf: Imports 15.24 15.43 +0.19 17.17
(10)P: CNP d e f l a t o r 6.26 5.35 4.91 6.21
(11)E: Consurnptlon 6.47 5.65 4.82 6.55
d e f l a t o r
(12)N: Persons e n g a g e d 0.93 1.09 +0.16 1.93 (13)W: Wage r a t e 14.41 13.26 -1.15 14.36
The simulation implies t h a t a simple i n c r e a s e in t h e growth rate of t h e popula- tion a n d l a b o r f o r c e would give r i s e t o a s u b s t a n t i a l amount of unemployment. Let us s u p p o s e t h a t t h e growth rates of government e x p e n d i t u r e s were i n c r e a s e d s o a s t o k e e p t h e l e v e l of employment growing a t t h e same rate a s t h e l a b o r f o r c e . According t o o u r c a l c u l a t i o n s , t h i s would r e q u i r e a n i n c r e a s e of 5 . 4 p e r c e n t in t h e growth rate of government e x p e n d i t u r e . Column (5) p r e s e n t s t h e r e s u l t s of t h i s simulation in t e r m s of t h e d i f f e r e n c e in growth rates between t h e h y p o t h e t i c a l a n d c o n t r o l solutions. I t i s i n t e r e s t i n g t o n o t e t h a t t h e e x p a n s i o n of t h e economy c a u s e d by a o n e - p e r c e n t i n c r e a s e in population and l a b o r f o r c e would l e a d t o a 2.35-percent i n c r e a s e in G N P growth rate a n d o n e of 1.16 p e r c e n t in t h e growth rate of consumption ( o v e r a l l , a slight i n c r e a s e in t h e growth rate of p e r c a p i t a consumption). S i n c e t h e state of t h e l a b o r m a r k e t i s k e p t unchanged, t h e i n c r e a s e s in t h e growth rates of t h e wage rate a n d t h e consumption d e f l a t o r would
b e r e l a t i v e l y moderate.
By means of a similar calculation f o r a 1 . 2 5 - p e r c e n t d e c r e a s e in population a n d l a b o r f o r c e , 1 4 i t was found t h a t , if t h e r e had b e e n no growth in population a n d l a b o r f o r c e d u r i n g t h e p e r i o d 1962-73 with government e x p e n d i t u r e s r e d u c e d s o as t o k e e p t h e unemployment rate unchanged, t h e growth rate of GNP would h a v e b e e n 6 . 9 3 p e r c e n t , in o t h e r words, t h a t t h e GNP growth rate would h a v e b e e n 2 . 7 3 p e r c e n t a g e p o i n t s lower t h a n in t h e c o n t r o l solution.
Growth accounting f o r t h e supply s i d e in S e c t i o n 2 indicated t h a t a one- p e r c e n t i n c r e a s e in t h e employment growth rate would give r i s e t o a n i n c r e a s e of 0.64 p e r c e n t i n GNP growth rate ( s e e column (2) of Table 2). Our c a l c u l a t i o n s indicate t h a t a o n e - p e r c e n t i n c r e a s e in both population and l a b o r f o r c e would yield a n i n c r e a s e of 2.35 p e r c e n t in t h e GNP growth rate, if t h e i n c r e a s e d l a b o r f o r c e were fully mobilized by e x p a n s i o n a r y government policies. But i t i s v e r y likely t h a t such policies would l e a d to problems of e i t h e r government o r balance-f- payment d e f i c i t s , which will b e discussed in t h e n e x t section.
5.9. Capital Stock
The e f f e c t s o n economic p e r f o r m a n c e of c a p i t a l accumulation are b e s t exam- ined by simulating t h e model with a n autonomous s h i f t in t h e investment function a n d t h i s d e v i c e h a s a l r e a d y been a d o p t e d in t h e analysis of t h e c o n t r i b u t i o n of investment i n c r e a s e to economic growth. T a b l e 7 p r e s e n t s t h e r e s u l t s of a simula- tion in which a n autonomous s h i f t of 1 . 7 p e r c e n t in t h e rate of c a p i t a l accumulation i s added to t h e o r i g i n a l model. Column (3) of t h e t a b l e shows t h a t a o n e - p e r c e n t i n c r e a s e in t h e accumulation rate will lead to 0.18-, 0.17-, a n d 0 . 4 4 - p e r c e n t r i s e s in t h e growth rates of GNP, employment, a n d investment, r e s p e c t i v e l y . The 0.17- p e r c e n t r i s e in t h e a v e r a g e growth rate of employment i s c l e a r l y impossible f o r t h e r e a s o n s given above. This implies t h a t a o n e - p e r c e n t i n c r e a s e in t h e growth rate of c a p i t a l s t o c k would n e c e s s i t a t e a complementary i n c r e a s e in t h e growth rate of t h e l a b o r force. Columns (4) a n d (5) p r e s e n t t h e r e s u l t s of a simulation
l4 The observed average annual growth rates of labor force and population were 1.25 and 1.31 per- cent, respectively. In t h i s simulation the growth rate of government expenditure was reduced by 9.8 percent.
t h a t i n c o r p o r a t e s a n autonomous s h i f t of 1 . 6 p e r c e n t in t h e rate of c a p i t a l accumu- lation a n d a s u p p l e m e n t a r y i n c r e a s e of 0.19 p e r c e n t in both l a b o r f o r c e a n d popu- lation. I t c a n b e s e e n t h a t a o n e - p e r c e n t r i s e in t h e growth rate of c a p i t a l s t o c k , t o g e t h e r with t h e 0.19-percent i n c r e a s e in t h e growth rates of l a b o r f o r c e a n d population, will give r i s e to i n c r e a s e s of 0.24, 0.50, a n d 0 . 1 9 p e r c e n t in t h e growth rates of GNP, investment, a n d employment, r e s p e c t i v e l y .
TABLE
7. E f f e c t s on economic p e r f o r m a n c e of c a p i t a l accumulation, 1962-73 (in p e r c e n t p e r annum).--
(1) (2) (3) (4) (5)
C o n t r o l 1 . 7 - p e r c e n t (2) - (1) 1 . 6 - p e r c e n t (4)
-
(1) s o l u t i o n s h i f t in t h e s h i f t in t h ec a p i t a l c a p i t a l
accumulation accumulation
rate rate
(1) POP: Population 1.25 1.25 0.0 1.44 +0.19
(2) LF: L a b o r f o r c e 1.31 1.31 0.0 1.50 +0.19
(3) CNP 9.66 9.84 +0.18 9.90 +0.24
(4) C: P r i v a t e 8.87 9.10 +0.23 9.14 +0.27
consumption
(5) F: P r i v a t e 12.68 13.13 +0.44 13.18 +0.50
investment
(6) X: Exports 14.24 14.01 4.23 14.19 4 . 0 5
(7) M : Imports 15.24 15.43 +0.19 15.45 +0.21
(8) P: CNP d e f l a t o r 6.26 6.57 +0.31 6.37 +0.11
(9)
PC:
Consumption 6.47 6.76 +0.29 6.57 +0.10d e f l a t o r
(10)N: P e r s o n s e n g a g e d 0.93 1.10 +0.17 1.12 +0.19
(11)W: Wage rate 14.41 14.88 +0.47 14.62 +0.21
( 1 2 ) m : Capital stock 10.28 11.28 +1.00 11.26 +0.98
Another simulation f o r a similar s c h e m e i n d i c a t e s t h a t , if t h e r e w e r e n o i n c r e a s e in c a p i t a l s t o c k , t h e r e d u c t i o n s in t h e growth rates of G N P a n d employ- ment would h a v e b e e n 2.72 a n d 2 . 4 1 p e r c e n t , r e s p e c t i v e l y . Table 8 summarizes t h e r e s u l t s of s e p a r a t i n g t o t a l GNP growth o v e r t h e p e r i o d 1962-73 i n t o t h e con- t r i b u t i o n s of individual f a c t o r s . Column (1) of t h e t a b l e c o r r e s p o n d s to column (3) of Table 2. I t i s i n t e r e s t i n g to n o t e t h a t , a c c o r d i n g to o u r calculations, t h e con- t r i b u t i o n s of t e c h n i c a l p r o g r e s s a n d employment are l a r g e r t h a n t h o s e a r r i v e d at using t h e conventional method, while t h e e f f e c t of c a p i t a l accumulation i s smaller. 15
l5 Since labor, capital, and technology do not exhaust the l i s t of growth factors in our econometric model, and the contribution of each supply factor includes the e f f e c t of supplementary changes in the demand factors, there remains a discrepancy in the average CNP growth rate between t h e con- trol solutlon and the total of t h e t h r e e contributlone. The 2.05-percent value for the discrepancy, however, lmplies that the contributions of t h e s e three f a c t o r s account f o r a substantial part of the total.
TABLE 8. Contribution of supply f a c t o r s t o t h e growth of G N P , 1962-73 (in p e r c e n t ) .
-
(1 (2 )
Contribution Share of or factor to (1)
CHP growth
(1)
N :
Persons engaged 2.73 23.3(2)
K:
Capltal stock 2.72 23.2(3) t : Technical progress 6.26 53.5
(4) Discrepancy -2.05
-
(5) V: CNP (control solution) 9.66 100.0
6. OBSTACLES TO GROWTII
In t h e p r e c e d i n g s e c t i o n s t h e c o n t r i b u t i o n s to economic p e r f o r m a n c e of demand a n d s u p p l y f a c t o r s h a v e been e v a l u a t e d . I t must b e emphasized, however, t h a t t h e economic p a t h s discussed a b o v e c a n n o t b e r e a l i z e d if t h e y e n c o u n t e r s e r i - o u s government or e x t e r n a l d e f i c i t s .
6.1. G o v e r n m e n t Deficits
B e f o r e t h e 1 9 7 3 oil c r i s i s , d e f i c i t s in t h e government budget imposed n o p r a c - t i c a l limitations o n t h e adoption of a n e x p a n s i o n a r y policy in J a p a n ; t h i s w a s l a r g e l y b e c a u s e t h e growth rate of nominal government e x p e n d i t u r e did n o t signifi- c a n t l y e x c e e d t h e growth rate of nominal government r e v e n u e . On t h e o t h e r h a n d a f t e r t h e oil c r i s i s , t h e slowdown in t h e growth rate of G N P a n d t h u s t a x r e c e i p t s , t o g e t h e r with t h e establishment of "big government" d u r i n g t h e 1960s, c a u s e d a g r e a t accumulation of government bonds within t h e economy a n d r e s t r i c t i o n s o n a n y f u r t h e r expansion of government e x p e n d i t u r e .
W e a d o p t as a m e a s u r e of t h e r e s t r i c t i o n of government e x p e n d i t u r e t h e r e l a - t i v e magnitudes of t h e growth rates of government outlay and r e v e n u e . Table 9 p r e s e n t s t h e growth rates of nominal government r e v e n u e a n d nominal government outlay o v e r t h e p e r i o d 1962-73. Column (1) of t h e t a b l e indicates t h a t r e v e n u e i s only slightly e x c e e d e d by outlay in t h e c o n t r o l solution d u r i n g t h i s p e r i o d . This i s c o n s i s t e n t with t h e f a c t t h a t e x p a n s i o n a r y government policy w a s not r e s t r i c t e d by t h e d e f i c i t problem b e f o r e 1973. Let u s assume t h a t a n e x c e s s of outlay growth rate o v e r r e v e n u e growth rate is t o l e r a b l e s o long as i t d o e s not e x c e e d 2.0 p e r - cent.16 The f i g u r e s in column (2) allow us to examine t h e feasibility of t h e growth p a t h p r e s e n t e d in columns (3) a n d (4) of Table 3. They indicate t h a t when t h e growth rate of r e a l government e x p e n d i t u r e i s i n c r e a s e d by o n e p e r c e n t , t h e growth rate of government outlay will e x c e e d t h a t of government r e v e n u e by 1 . 0 6 p e r c e n t . T h e r e f o r e , a c c o r d i n g to o u r measure. t h e e x p a n s i o n a r y poiicy of a one- p e r c e n t i n c r e a s e in r e a l government outlay i s f e a s i b l e from t h e viewpoint of government budget, although. as shown a b o v e , i t i s impossible d u e t o t h e s h o r t a g e of l a b o r .
TABLE
9. Feasibility of v a r i o u s growth rates, 1962-73 (in p e r c e n t p e r annum).(1) (2) (3)
C o n t r o l Government 1.0 X r i s e s o l u t i o n o u t l a y in l a b o r
i n c r e a s e f o r c e
(1) CG: Government consumption 5.39 6.39 10.79
(2) IG: Government i n v e s t m e n t 12.75 13.75 18.15 (3)
POP:
Population 1.25 1.25 2.25(4)
w:
L a b o r f o r c e 1.31 1.31 2.31(5) Government r e v e n u e 18.21 18.88 21.70
(nominal)
(6 ) Government o u t l a y 18.97 19.94 23.79
(nominal)
( 7 ) = (5)
-
(6) -0.76 -1.06 -2.09 -l6 In fact, the actual growth r a t e of outlay exceeded t h a t of revenue by 1.4 percent over the period 1962-73, and the government deficit problem was not serious.
