Download lec.11

Economic Development of Japan
TRADE
YEN
OIL
No.11 Economic Maturity & Slowdown
TOPICS – 1970s & 80s
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•
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End of catching up, economic maturity
Global stagflation in the 1970s
Growth vs. inequality (and other social evils)
Interpretation of the Japan system
Current account surplus & international
politics – trade friction, exchange rate
pressure, systemic demands
• The 1955 Regime (LDP dominance)
Growth Slowdown in the 1970s-80s
• Japan’s economic maturity—income reached
the world’s highest level
• Oil shock and global stagflation
• General floating of major currencies
Catching Up: Real Per Capita GNP
(1995 dollars, conversion at actual exchange rate)
50000
100
40000
Per Capita Income at PPP
(US=100, price-level
adjusted)
80
30000
US
60
20000
Japan
10000
0
US
W.Ger.
France
Japan
UK
Italy
40
20
1950
1955 1960
1965 1970
1975 1980
1985 1990
1994
10582 12060 13046 15454 17310 18754 21392 23858 26744 28157
US
Japan 776 1336 2127 3984 6962 11676 16486 15658 28912 40421
0
1955
1965
1975
1980
Speed of Catching Up: East Asia
Per capita real income relative to US
(Measured by the 1990 international Geary-Khamis dollars)
100%
Japan
90%
Singapore
80%
Hong Kong
70%
Taiwan
60%
S. Korea
50%
Malaysia
40%
Thailand
Indonesia
30%
Philippines
20%
Vietnam
10%
China
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
1950
0%
Sources: Angus Maddison, The World Economy: Historical Statistics, OECD Development Centre, 2003; the
Central Bank of the Republic of China; and IMF, World Economic Outlook Database, April 2010 (for updating).
Real GDP Growth (Fiscal Year – April to March)
Average 1956-73 9.1%
Average 1974-90 4.2%
Average 1991-2010 0.9%
Source: The System of National Accounts site, Cabinet Office.
PP.188-90
The Cause of 1970s Stagflation
P
Supply shock view
AS
• OPEC’s oil price hike was the main cause.
Aggressive wage hikes also contributed.
• Expansionary fiscal & monetary policy
accommodated and softened the blow.
AD
Global monetarist view
Y
1974
1972
1970
1968
1966
1964
World Money Growth
1962
Source: McKinnon (1979), p.264
1960
• As US lost monetary discipline, the fixed rate
regime collapsed in 1971-73 and USD fell. 14 %
12
• Major central banks expanded money to
10
counter appreciation pressure, causing global 8
liquidity glut in the early 1970s.
6
4
• Oil shock was the result, not the cause, of
2
global inflation.
0
Bretton Woods World Dollar Standard
• USA as the center country providing price stability to the world (“benign
neglect”: US to mind domestic affairs only); all other countries set “parities”
against US$ (“adjustable peg”).
Gold=US$=other currencies
• 1950s-early 60s: American prices were stable; BW system achieved high
growth & price stability globally.
• Mid 60s-early 70s: US began to inflate & US$ was under downward
pressure (war in Vietnam, social welfare, space race with USSR).
• Gold=US$ link broken (1968); US$=other currencies link broken (1971-73:
Nixon Shock). Floating exchange rates began.
P.187
Growth
Inflation (12-month
change)
MonetaryMonetary
Growth
andand
Inflation
(12-month
change)
40%
M2+CD
WPI
CPI
30%
20%
10%
0%
-10%
1965Q1
1966Q1
1967Q1
1968Q1
1969Q1
1970Q1
1971Q1
1972Q1
1973Q1
1974Q1
1975Q1
1976Q1
1977Q1
1978Q1
1979Q1
1980Q1
1981Q1
1982Q1
1983Q1
1984Q1
1985Q1
1986Q1
1987Q1
1988Q1
1989Q1
1990Q1
1991Q1
1992Q1
1993Q1
1994Q1
1995Q1
1996Q1
1997Q1
1998Q1
1999Q1
-20%
Bubble
Bretton Woods
fixed dollar
system ends
1st oil shock
General float
begins
2nd oil shock
Bubble collapses
Plaza Agreement
High Growth & Inequality
 Japan, Korea and Taiwan narrowed internal income
gaps (personal, sectoral, regional); but in China,
Thailand, Philippines, Indonesia, Vietnam, etc. income
became polarized during high growth.
 To sustain growth and achieve high income, three
policies are needed. In principle, they can be executed
separately—cf. “pro-poor growth,” “inclusive growth”
(1) Industrial policy—creation of growth sources
(2) Social policy—coping with new problems caused by
high growth: income gaps, pollution, migration, traffic,
congestion, crime & corruption, cultural change…
(3) Macroeconomic management under globalization—
coping with global business cycles, price shocks, huge
and unstable capital flows
Separability of Growth & Social Policies in
E.Asia’s Successful Latecomers
Economic growth
START
Developmental policies
Generation of
growth sources
New social problems
Macro instability under
integration
Political stability
END
A few decades later
Exit to a richer & more democratic
society (examples: Korea, Taiwan)
Supplementing
policies
- Social policies
- New macro
management
Precision machinery
Transport machinery
Electrical machinery
General machinery
Metal products
Iron and steel
Ceramics etc.
Oil and gas
Chemicals
US (1972) (1997) chap.2
McKinnon-Ohno
60
Nonferrous metals
Japan (1969)
Paper and pulp
80
Wood products
100
1954-73
1974-90
Textiles
(estimated by labor-material
Cobb-Douglas prod. func.)
12
10
8
6
4
2
0
-2
-4
Food
Productivity
Slowdown
Productivity Change by Industry (%/year)
W. Germany (1973)
40
France (1970)
UK (1973)
20
Italy (1969)
Income Distribution
(Lorenz Curve)
OECD Economic Outlook, July 1976
Top 20%
Next 20%
Next 20%
Next 20%
Lowest 20%
0
--Postwar land reform
--Agricultural subsidies (1955 Regime)
--Labor migration to cities
Sharing of Fruits of Growth between Rich &
Poor, Urban & Rural, Industry & Agriculture
• Japan around 1960s—direct (income) tax for redistribution,
rural-urban labor migration, SME support, fiscal policy in favor
of rural areas (public investment, agro subsidy & protection,
regional development plans, etc.); household Gini coef.: 0.31
(1963), 0.25 (1970)
• Korea around 1970s—Saemaul (New Village) Movement for
invigorating and improving rural life and production; regional
income gaps were small and even narrowed; regional Gini coef:
0.16 (1971), 0.08 (1981), 0.06 (1991)
• Taiwan 1960s-80s—Strong export-led growth driven by
vigorous SMEs
• Indonesia—Gini coefficient 0.32 in 1990, 0.33 in 2002, 0.41 in
2012.
The Japan System: Delayed Reform?
PP.190-91
• After catch-up industrialization, Japan should have
changed its system in the 1970s
Long-term relations
Official intervention
Open markets
Private initiative
• However, large macro shocks (oil shocks, floating,
stagflation, trade disputes) diverted policy makers’
attention from structural issues.
• As a result, the Japanese economy continues to be
over-regulated even today.
Opposing view:
• Don’t copy US financial capitalism—trust, stability,
equity, patience, teamwork should be maintained.
The 1940 Regime: Farewell to the War
Economy by Yukio Noguchi (1995)
• I would like to advance the hypothesis that the key
components of the Japanese economy today were created
during the war.
• The 1940 Regime--(i) production-first; (ii) suppression
of competition, (iii) social policies to reduce friction
• These alien systems were implanted to execute total war
(enterprise system, finance, bureaucracy, land reform)
and they continued as systemic core even after the war.
• They worked well for high growth, but not for coping
with change. Deregulation and consumer-oriented
society cannot be realized unless this regime is removed.
Kaikaku Gyakuso (Reform in
Reverse) by Hiroko Ota, GRIPS (2010)
• Prof. Ota was the Minister of Economy and Fiscal Policy
during 2006-2008 (serving PM Abe and PM Fukuda),
promoting economic deregulation and fiscal discipline.
• The Democratic Party government (2009-2012） has
reversed the economic reform and reintroduced past
policies that do not work any more:
– Fiscal activism & random subsidies leading to fiscal
crisis
– Economic deregulation was slowed down or reversed.
Mercantilist Pressure on Surplus Countries
Komiya (1994), McKinnon-Ohno (1997), McKinnon (2005)
When a country emerges as a new industrial power, it is often
criticized for unfair trade practice and an undervalued currency.
Trade and exchange pressures mount. But the trade gap cannot be
eliminated by currency appreciation or trade liberalization.
Ronald McKinnon
PP.191-94
Elasticities Approach vs. Absorption Approach
in Financially Open Economies
Conventional view (elasticities approach)
• Exchange rate adjustment can reduce Japan’s trade surplus and
US trade deficit.
Fred Bergsten, W. Cline (IIE, Washington)
Krugman—the Mass. Ave. Model: Imports = f (yt, rert-2)
Friedman, Krugman— “daylight saving time” argument for currency float
Our unconventional view (syndrome of the ever-higher yen)
• Thanks to wrong economics and Washington lobbying, the yendollar rate was manipulated for mercantile purposes.
• But yen appreciation could not reduce Japan’s surplus and US
deficit, because it was structural (US savings < US investment).
The real solution was increasing US savings.
Current account = Y – A = S – I
• Intermittent yen appreciation only destabilized the Japanese
economy through recession, deflation and depressed interest
rates.
1971-73, 1977-78,
1985-87, 1993-95
Japan’s surplus
with US
American responses
Pressure to
appreciate yen
Bilateral trade
negotiations
Reinforcement through failure
Persistent
trade gap
Exchange Rate Impacts Are Complex...
Subject to M-L condition & J-curve
Relative
price effect
Yen
appreciation
E
Engineered
(+/?)
Competitiveness
Price
channel
(-)
Passthrough
offset
Inflation
Reverse
absorption effect
Absorption
Monetary
expansion
LM curve shifts
(-)
Trade
balance
Quantity
channel
“Endaka fukyo” or
high-yen induced recession
--Countries with large foreign
exchange inflows often buy up USD
to resist currency appreciation
--However, having too much foreign
reserves may cause:
--Excess liquidity and bubbles
--Unbalanced asset position
--Exchange risk
Reserves
TradeInternational
surplus against
US ($billion)
“Original sin” (inability to borrow in home currency)
• Developing countries that borrow in USD face
exchange risks in trade and debt payments. This may
lead to higher risk premium, higher interest rates,
balance-sheet mismatches, and the possibility of
currency crisis.
“Conflicted virtue” (inability to lend in home currency)
• Any high-saving country that lends in USD faces (i)
exchange risk on accumulated foreign assets, both
private and public; and (ii) accusation of unfair trade
and pressure to appreciate the currency by deficit
countries (esp. US)
• If the leading economy (US) is the largest lender, this
problem does not arise. In fact, it is now the largest
borrower.
Estimates of
Japan’s Net Liquid International Asset Holdings
(% of GDP)
40%
30%
USD 1.17 trillion
Private
Official
20%
10%
0%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
-10%
Source: R. McKinnon, “Japan’s Deflationary Hangover: The Syndrome of the Ever-Weaker Yen,”
April 2007.
P.178
The 1955 Regime (LDP political dominance)
• The Liberal Democratic Party (LDP) formed in 1955,
held power until now (except 1993-96, 2009-12)
• Securing rural votes by subsidizing agriculture and
building rural infrastructure (firmly established by
PM Kakuei Tanaka 1972-74).
• LDP had many factions and zoku-giin groups
(politicians promoting subsidies in particular sectors)
• Opposition parties were too weak
to challenge LDP’s rule.
LDP
• Reform movement inside LDP
Koizumi reform—how successful?
Factions & zoku-giin
Was it desirable?
Other parties
Abe, Fukuda, Aso: weak PMs
Now second Abe
Democratic
institution
(Form)
Constitution
Laws
Parliament
Election
Court
Full
democracy
US rule
Showa2
1960
Now?
1945-51
Democratization
New constitution
LDP dominance
Lack of policy debate
Military rises
1931 Democracy
movement,
Party cabinet
1937
Defeat
War
Male suffrage 1925
Showa1
Taisho
Constitution 1889
Parliament
Fascism 1937-45
Edo
Pure
dictatorship
Meiji
Political fights
Reform vs conservatism, big vs small
government, other policy debates
(Content)
Political
competition