Japan’s lost decade myth

Gulzar points to this superb article from Daniel Gros.

Gros says Japan’s lost decade is a myth as it grew faster than US in that period of 1990s. He says much of this talk of Japan’s lost decade is based on GDP growth. But it is not the right measure:

How should one compare growth records among a group of similar, developed countries? The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita). This last element is important because only the working-age population represents an economy’s productive potential. If two countries achieve the same growth in average WAP income, one should conclude that both have been equally efficient in using their potential, even if their overall GDP growth rates differ.

When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.

Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade. By contrast, the US unemployment rate has almost doubled, now approaching 10%. One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential.

He says demographics will play a crucial role going forward. As these populations age further, worse is to come.

Looking to the decade ahead, this analysis suggests that one can predict the rich countries’ relative growth rates based on the growth pattern of their working-age populations, which one already knows today, given that anybody starting to work over the next two decades has already been born.

On this basis, Japan’s relative decline as a major economic power will continue, as its working-age population will continue to shrink by about 1% per year. Germany and Italy increasingly show Japanese patterns of decline in their working-age populations, and are thus likely to grow very little as well.

In the case of Germany, one observes an interesting kink in its demography: from 2005-2015, the working-age population is temporarily stabilized. But this will be followed by accelerating decline, as the working age population declines even faster than in Japan.

The current strength of the German economy is also partly due to this temporary demographic stabilization. But a Japanese-style scenario seems inevitable after 2015. By contrast, the US, the United Kingdom, and France are likely to grow faster for the simple reason that their working-age populations are continuing to grow, even if at a relatively slow pace.

Two lessons from this:

Two lessons emerge from this consideration of the influence of demographic factors on economic growth. First, the idea of a Japanese-style “lost decade” is misleading – even when applied to Japan. Slow growth in Japan over the last decade was due not to insufficiently aggressive macroeconomic policies, but to an unfavorable demographic trend.

Second, a further slowdown in rich countries’ growth rates appears inevitable, given that even in the more dynamic countries the growth rates of the working-age population is declining. In the less dynamic ones, like Japan, Germany, and Italy, near-stagnation seems inevitable.

Very interesting thought. How things change using different variables for measuring economic performance. Suddenly Japan’s performance looks better than US. And based on Gros, if Japan had a lost decade, so did others. And we call this phase as Great Moderation with high growth and low volatility! So ironical all this.

Again so much of economics and its measurement is in grey. Instead of solving these economists just get into other fancy ideas.  

Demographics which were seen as so important before the crisis and discussed by many, has also been sidelined in this crisis. Anotehr victim of the crisis.

One Response to “Japan’s lost decade myth”

  1. Balance Sheet Adjustment under Population Ageing « Mostly Economics Says:

    […] also  takes me to this recent article which said lost decade of Japan is a myth. Based on demographics, it grew faster than US. So, in a […]

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