Home » Uncategorized

“High Growth: Lessons for China from the Japanese Experience” by Michael Mirochnik

2 December 2010 11,714 views No Comment

I. Introduction

This paper compares the period of high economic growth in Japan, between 1955 and 1973, to the high growth that the People’s Republic of China has enjoyed since 1990. The literature points to Japan’s relatively high household saving rate[i] and low and steady population growth rate for its economic success, when real GDP increased annually at an average of 9.3 percent.[ii] Similarly, China’s astounding household saving rate has promoted high investment per capita while its “one-child family policy” has resulted in a decreasing population (Ding and Knight 2009), and both have contributed to real GDP growing annually at an average of 9.9 percent.[iii] These factors predict per capita growth within the standard exogenous growth Solow-Swam Model, but there must be another factor at work, namely technological acquisition, which explains why such sustained high growth is still possible in light of diminishing returns. Thus, I utilize economic growth accounting to gauge the countries’ technological acquisition, and then subsequently consider GDP decomposition, thereby revealing an emerging, unusual consumption pattern in China. I conclude by drawing lessons from Japan’s high growth period to form prescriptions for China to further foster positive economic growth. In doing so, this paper contributes to the literature on growth theory and the ongoing debate (Engardio et al 2009, Tasker 2009 and Xie 2009), as to whether China is doomed to tread the path of its East Asian neighbor or is able to ensure enduring economic growth.

II. Economic Growth Accounting

During high growth, Japan’s per capita GDP and per capita disposable income moved in tandem with its household saving rate while its population growth was fairly steady and low, and the latter remained so even after 1973. This suggests that a decreasing saving rate was a major contributing force in Japan’s fall from high growth. China, on the other hand has not been as sensitive to its saving rate, which is evidenced by the country’s increasing per capita GDP and per capita disposable income in light of a recently decreasing household saving rate. Furthermore, China has benefitted from a low population growth that continues to decrease. This section will expand the existing analysis within growth literature by considering the two countries’ growth via technological progress and acquisition.

Any combination of growth in an economy’s technology, capital stock, and labor force results in output growth. Economic growth accounting is based on the following relationship (Weinstein 2009):

where Gy is the growth rate of GDP, GA is the growth rate of technology, or Total Factor Productivity (TFP), Sk is the capital share of GDP, Gk is the growth rate of capital stock, Sl is the labor share of GDP, and Gl is the growth in labor force. Data for all the variables, save GA, are available via an economy’s National Accounts. Thus, TFP can be derived as a residual, or the growth in GDP unexplained by either capital stock or labor force growth:

The decomposition of economic growth for both Japan, from 1949-1983, and China, from 1980-2007, may be found in Appendix A. For practical purposes, total disposable income is used as a proxy for total capital stock in the economy and total population is used as a proxy for the size of the labor force.

Growth decomposition for the high growth periods is displayed in Table 1.

Table 1: Growth Decomposition for Japan and China during High Growth

Data presented as average annual values
Growth Rates of Japan (1955-1973) China (1990-2007)
Output 15.13% 16.37%
Capital 15.43% 16.72%
Labor 1.45% 1.30%
Contribution to Growth from
Capital 9.24% 14.60%
Labor 0.58% 0.17%
Technology 5.31% 1.60%

Source: Historical Statistics of Japan and China Statistical Yearbook 2008.

Both economies experienced comparable growth rates of output, capital, and labor force. The high contributions to growth from capital for both Japan and China denote that capital accumulation was the key to growth, much more so in the case of China. Capital, however, exhibits diminishing returns to scale, whereas technology fuels long-term, sustained economic growth. An important difference between the two periods of high growth is Japan’s significantly higher contribution to growth from TFP compared to that of China, which suggests that Japan was on track for further sustained growth but was thwarted by its decreasing saving rate and the oil crisis of 1973, an exogenous event that stymied global technological progress.

Table 1 further shows that China has yet to truly wield the potential of technological progress, as only 1.6 percent of output growth from 1990-2007 can be contributed to TFP. As seen in Table A.1 and A.2 in Appendix A, Japan experienced a notable decrease in TFP from 1974 to 1975 and it continued decreasing as Japan moved further from high growth. The year-on-year TFP values for China have varied, but they are mostly small and even negative – suggestive of technological acquisition underutilization in promoting growth. China, therefore, is growing mainly due to vast capital accumulation, but such growth is unsustainable as diminishing returns to capital are a reality. To promote long-term sustained growth, China should take advantage of the fact that its saving rate has not yet begun to consistently drop like Japan’s did towards the end of its high growth and should adopt a technological acquisition agenda comparable to Japan’s during high growth.

III. Decomposition of GDP for Japan and China

In the previous section I considered Total Factor Productivity growth – an essential driver of sustainable economic growth – for high growth in Japan and China.  I will now consider each country’s national accounts to see where the high growth periods left each economy.

During Japan’s high growth period both real and nominal GDP, along with the elements that comprise the expenditure calculated GDP, experienced a general upward trend. Nevertheless, important changes in the composition of nominal GDP occurred during and after high growth, as seen in Table 2 below.

Table 2: Decomposition of Japan’s GDP

All values represent percentages of GDP
Year Consumption Investment Government Spending Net Exports
1955 65.7 23.6 10.1 0.5
1960 58.7 32.9 8.0 0.5
1965 58.5 31.9 8.2 1.4
1970 52.3 39.0 7.4 1.3
1973 53.6 38.1 8.3 0.0
Post High Growth
1975 57.2 32.8 10.0 0.0
1980 58.8 32.2 9.8 -0.9
1983 60.2 28.1 9.9 1.8

Source: Historical Statistics of Japan.

From 1955 to 1983, government spending and net exports accounted for a roughly consistent proportion of GDP, with net exports in 1980, comprising -0.9 percent of GDP, presenting an exception. Concordant with Japan’s increasing saving rate during high growth, the data shows consumption as a proportion of GDP decreased, from 65.7 percent of GDP in 1955 to 53.6 percent of GDP in 1973, while investment rose, from 23.6 percent of GDP in 1955 to 38.1 percent of GDP in 1973. The decreasing saving rate that contributed to the end of Japanese high growth reversed these trends – consumption and investment as proportions of GDP increase and decrease, respectively, in post high growth, with the former comprising 60.2 percent of GDP and the latter comprising only 28.1 percent of GDP by 1983.

This is not only consistent with the changes in Japan’s household saving rate but also coincides with the life cycle hypothesis, which holds that the “aggregate household saving rate will be higher in a country with a young population because the young typically work and save, whereas the elderly typically retire from work and dissave” (Horioka 2008).

Table 3: Population over Age 65 and Household Saving Rate for Japan

Year Population of the Population over Age 65 Household Saving Rate
1950 4.89% 14.74%
1955 5.27% 13.89%
1960 5.72% 17.30%
1965 6.29% 17.05%
1970 7.06% 20.28%
1975 7.92% 23.11%
1980 9.10% 18.45%
1985 10.30% 16.01%
1990 12.05% 13.24%
1995 14.54% 14.68%

Source: Historical Statistics of Japan and Long-Term Economic Statistics of

Japan since 1868, Vol. 1.

As seen in Table 3, after 1975, when the elderly population surpassed 7 percent of Japan’s total population, the household saving rate began decreasing from a high of about 23 percent to roughly 13 percent in 1990 as the elderly population continued to comprise an increasing proportion of Japan’s total population. Population aging did not necessarily force Japan from high growth, but there is a noticeable negative relationship between Japan’s growing elderly population and the saving rate following high growth.  The life cycle hypothesis remained applicable in Japan well after the end of its high growth (Horioka 1997).

China, however, does not appear to adhere as closely to the life cycle hypothesis.

Table 4: Population over Age 65 and Household Saving Rate for China

Year Percentage of Population over Age 65 Household Saving Rate
1982 4.91% 13.39%
1990 5.57% 38.14%
2000 6.96% 64.84%
2007 9.36% 69.14%

Source: China Statistical Yearbook 2008.

Since 2007, the proportion of elderly in China’s population has surpassed that of Japan in 1980, by which time the latter’s saving rate experienced a noticeable cut. China’s saving rate, though lower in 2007 than it was in 2005, has experienced significant increases throughout its high growth and continues to have the extremely high level of 69 percent, even with over 9 percent of its population being over age 65.  This has contributed to China’s particular GDP decomposition throughout high growth; GDP and all of its components have experienced a general upward trend since 1990, but an unusual consumption pattern has emerged.

Table 5: Decomposition of China’s GDP

All values represent percentages of GDP
Year Consumption Investment Government Spending Net Exports
1990 50.6 36.1 14.1 2.7
1995 46.7 41.9 13.8 1.6
2000 46.2 35.1 15.8 2.4
2005 38.9 44.0 14.5 5.6
2007 37.4 44.7 14.1 9.4

Source: China Statistical Yearbook 2008.

Table 5 above shows that like in Japan, government spending has comprised a fairly consistent proportion of GDP during China’s high growth. Net exports, however, have contributed more to GDP in China and have become more important since 2005, accounting for 9.4 percent of GDP in 2007. Similar to Japan, China has experienced decreasing consumption, from 50.6 percent of GDP in 1990 to 37.4 percent of GDP in 2007, and increasing investment, from 36.1 percent of GDP in 1990 to 44.7 percent of GDP in 2007, during high growth. However, China has been unable to maintain normal consumption. Normal consumption is such that consumption accounts for a larger proportion of GDP than does investment. Since 2004, China’s level of investment has contributed more to GDP than has consumption, and this has continued through 2007. This is directly related to China’s persistently high saving rate. Although this does contribute to China’s rapid growth, having a GDP most dependent on investment makes China’s economy more susceptible to drastic shifts, as investment is pro-cyclical and more volatile than consumption.

This GDP decomposition further confirms the change in Japan’s saving rate. I have also confirmed that the life cycle hypothesis is applicable to Japan. This, however, is not the case for China’s saving rate which, though having fallen slightly since 2005, has had general growth and remains high in spite of an aging population. This highlights its insufficiency of old-age benefit programs and trepidation of consumption spending. The GDP decomposition for China also reveals that its investment proportion of GDP has been higher than consumption’s proportion of GDP since 2004, putting it at a greater risk of more abrupt movements in its economy.

IV. Conclusion

The foregoing analysis served an important, informative purpose in understanding the high growth periods of both Japan and China. Japan’s high growth was mainly fueled by a high and increasing saving rate. Furthermore, Japan’s technological acquisition similarly contributed to its rapid growth. Nevertheless, Japan’s household saving rate – possibly due in part to its aging population – began decreasing after a 1973 peak and prompted Japan’s fall from high growth.  A subsequent decrease in TFP exacerbated the situation and shifted Japan further from its ‘economic miracle’.

Japan’s East Asian neighbor, China, has experienced remarkable growth during its own high growth period. China’s rapid growth may be attributed to its extremely high saving rate – although China appears less dependent on the household saving rate than was Japan – and a low and slowly decreasing population growth rate. Furthermore, China’s growth has been facilitated almost exclusively through capital accumulation while technological acquisition has largely been neglected. The high saving rate that assists in China’s large-scale capital accumulation has resulted in investment composing a greater proportion of GDP than does consumption, and thus producing a potentially more volatile economy.

The potential of more erratic shifts in China’s economy is unsettling, but important lessons from Japan’s high growth may be applied to promote further positive growth in China. China should take advantage of its current high saving rate and adopt a technological acquisition agenda comparable to that of Japan during high growth. Technology is a long-term growth mechanism for China, especially since diminishing returns are inherent in capital accumulation. To protect its economy from erratic movements, China should strive for normal consumption by raising income levels, thereby tightening the gap between per capita disposable income and per capita GDP growths; this would also allow its population to dissave. Finally, China should establish stronger safety nets and social welfare programs, especially for the elderly, as it is now clearly not following the life cycle hypothesis. If the government were to assist citizens in potential future emergencies, the high saving rate would likely be curtailed (Prime and Qi 2009) and current consumption induced, thereby working against the formation of a possible bubble economy.

If growth is simply measured using current output levels or Gross Domestic Product as a marker, then one may conclude that China is faring excellently and should continue enjoying its economic fortunes. However, examining China’s growth and GDP decomposition reveals that its high growth is distinct from that of Japan. Japan was thwarted from high growth, in addition to the aforementioned reasons, by means of the exogenous oil crisis of 1973. China may befall a similar fate, but it possesses resources that Japan has lacked throughout its history and thus may prove more robust to exogenous shocks. Further, so long as China redirects some efforts from capital accumulation to technological acquisition while simultaneously allowing its citizens to enjoy the benefits of its flourishing economy, the People’s Republic of China may likely establish itself as a lasting economic superpower. By following these prescriptions, China will be able to sustain high growth for the immediate future, as any decrease in growth from saving rate decline can be offset through greater technological acquisition, and ensure a healthier, more stable economy in the long run.

Michael Neal Mirochnik is a senior at Columbia College in the City of New York. He will receive his BA in economics and complete his concentration of Russian language and culture by May 2011.

Bibliography

Ding, Sai & Knight, John. 2009. Can the augmented Solow model explain China’s remarkable economic growth? A cross-country panel data analysis. Journal of Comparative Economics, Volume 37. 432 – 452

Engardio, Pete, Roberts, Dexter & Zhe, Huang. 02/11/2009. The China Hype. Business Week.

Horioka, Charles Y. 2008. The Flow of Household Funds in Japan. Public Policy Review, Volume 4, Number 1. 37 – 52

Horioka, Charles Y. & Watanabe, Wako. 1997. Why Do People Save? A Micro-Analysis of Motives for Household Saving in Japan. The Economic Journal Volume 107, Issue 442. 537 – 552

Japan Statistics Bureau. 1996 – 2008. Historical Statistics of Japan. Ministry of International Affairs and Communications.

National Bureau of Statistics of China. China Statistical Yearbook 2008. China Statistics Press.

Prime, Penelope B. & Qi, Li. 2009. Market Reforms and Consumption Puzzles in China. China Economic Review, Volume 20, Issue 3. 388 – 401

Ohkawa, Kazushi, Takamatsu, Nobukiyo & Yamamoto, Yuzo. 1974. Estimates of Long-Term

Economic Statistics of Japan Since 1868. Volume 1. Tokyo: Toyo Keizai Shinposha.

Tasker, Peter. 03/11/2009. China rushes towards a Japan-style bubble. Financial Times.

Weinstein, David. 2009/10/13. Class Lecture, Japanese Growth.

Xie, Andy. 2009. Fortune is favouring China, but is it due for a reality check? Financial Times.

Appendix A: Economic Growth Accounting

Table A.1: Economic Growth Accounting for Japan (1949-1983)

Year Growth Rate of GDP Growth Rate of Capital Growth Rate of Labor Contribution to Growth from Capital Contribution to Growth from Labor Total Factor Productivity Growth
1949 26.68% 39.55% 4.59% 26.15% 1.56% -1.03%
1950 16.88% 23.59% -0.77% 15.13% -0.28% 2.03%
1951 37.91% 33.81% 1.22% 22.51% 0.41% 15.00%
1952 15.01% 9.70% 3.14% 6.17% 1.14% 7.70%
1953 12.72% 16.75% 5.67% 9.92% 2.31% 0.49%
1954 11.07% 12.67% 1.65% 7.52% 0.67% 2.88%
1955 6.81% 14.62% 3.43% 8.86% 1.35% -3.40%
1956 12.58% 12.12% 1.76% 7.24% 0.71% 4.62%
1957 15.24% 15.57% 2.23% 9.47% 0.87% 4.90%
1958 6.26% 4.40% 0.55% 2.61% 0.22% 3.43%
1959 14.32% 14.86% 1.05% 8.92% 0.42% 4.98%
1960 21.37% 22.01% 1.76% 13.65% 0.67% 7.06%
1961 20.78% 20.51% 1.13% 12.89% 0.42% 7.47%
1962 13.48% 11.92% 1.14% 7.28% 0.44% 5.76%
1963 14.45% 15.04% 0.82% 9.10% 0.33% 5.02%
1964 17.63% 15.33% 1.25% 9.33% 0.49% 7.81%
1965 11.25% 11.11% 1.63% 6.56% 0.67% 4.02%
1966 16.14% 16.15% 2.17% 9.60% 0.88% 5.66%
1967 17.19% 18.15% 1.88% 10.93% 0.75% 5.51%
1968 18.43% 17.80% 1.57% 10.84% 0.61% 6.97%
1969 17.47% 17.25% 0.73% 10.49% 0.29% 6.69%
1970 17.86% 18.69% 1.08% 11.22% 0.43% 6.21%
1971 10.03% 9.27% 0.64% 5.29% 0.27% 4.46%
1972 14.49% 15.22% 0.25% 8.57% 0.11% 5.81%
1973 21.76% 23.17% 2.44% 12.73% 1.10% 7.93%
1974 19.33% 17.93% -0.30% 9.33% -0.14% 10.15%
1975 10.49% 10.63% 0.24% 5.30% 0.12% 5.07%
1976 12.30% 13.42% 1.03% 6.69% 0.52% 5.09%
1977 11.44% 10.97% 1.38% 5.50% 0.69% 5.25%
1978 10.12% 10.46% 1.47% 5.36% 0.71% 4.04%
1979 8.39% 8.48% 1.16% 4.38% 0.56% 3.45%
1980 8.41% 7.80% 0.96% 4.04% 0.47% 3.91%
1981 7.41% 6.61% 1.01% 3.43% 0.49% 3.49%
1982 4.90% 5.11% 1.17% 2.63% 0.57% 1.70%
1983 4.13% 3.93% 1.99% 2.01% 0.97% 1.14%

Source: Historical Statistics of Japan.

Table A.2: Economic Growth Accounting for China (1980-2007)

Year Growth Rate of GDP Growth Rate of Capital Growth Rate of Labor Contribution to Growth from Capital Contribution to Growth from Labor Total Factor Productivity

Growth

1980 11.89% 25.80% 2.75% 21.42% 0.47% -9.99%
1985 25.08% 24.60% 3.55% 20.82% 0.54% 3.72%
1990 9.86% 24.07% 5.97% 20.27% 0.94% -11.35%
1991 16.68% 10.79% 1.15% 9.15% 0.17% 7.36%
1992 23.61% 18.01% 1.01% 15.37% 0.15% 8.09%
1993 31.24% 25.94% 0.99% 22.33% 0.14% 8.77%
1994 36.41% 38.04% 0.97% 32.79% 0.13% 3.49%
1995 26.13% 29.10% 0.90% 25.22% 0.12% 0.79%
1996 17.08% 21.57% 1.30% 18.82% 0.17% -1.91%
1997 10.95% 11.31% 1.26% 9.96% 0.15% 0.84%
1998 6.87% 7.83% 1.17% 6.97% 0.13% -0.22%
1999 6.25% 8.76% 1.07% 7.79% 0.12% -1.66%
2000 10.64% 8.37% 0.97% 7.47% 0.10% 3.06%
2001 10.52% 10.87% 1.30% 9.70% 0.14% 0.68%
2002 9.74% 12.79% 0.98% 11.39% 0.11% -1.76%
2003 12.87% 11.83% 0.94% 10.55% 0.10% 2.22%
2004 17.71% 14.38% 1.03% 12.86% 0.11% 4.74%
2005 14.60% 14.13% 0.83% 12.60% 0.09% 1.91%
2006 15.67% 13.89% 0.76% 12.37% 0.08% 3.22%
2007 17.75% 19.35% 0.77% 17.16% 0.09% 0.50%

Source: China Statistical Yearbook 2008.


[i] Horioka, Charles Yuji. “The Flow of Household Funds in Japan.” Public Policy Review 4.1 (2008): 37-52. Policy Research Institute, Ministry of Finance, Japan.

[ii] Author’s calculation based on Historical Statistics of Japan.

[iii] Author’s calculation based on China Statistical Yearbook 2008.

   
1 Star2 Stars3 Stars4 Stars5 Stars (No Ratings Yet)
Loading ... Loading ...

Leave your response!

Add your comment below, or trackback from your own site. You can also subscribe to these comments via RSS.

Be nice. Keep it clean. Stay on topic. No spam.

You can use these tags:
<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

This is a Gravatar-enabled weblog. To get your own globally-recognized-avatar, please register at Gravatar.