RIETI Policy Symposium

Determinants of Total Factor Productivity and Japan's Potential Growth: An International Perspective


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Panel Discussion

Panel Discussion Outline

In the panel discussion, the four panelists first gave presentations on the subject of Japan's economic growth, and then engaged in a discussion concerning policy for growth and the outlook for IT.

Outline: MORIKAWA Masayuki Presentation

Mr. Morikawa's presentation took up the subject of the New Economic Growth Strategy, drawn up by the Ministry of Economy, Trade and Industry (METI), and how it relates to TFP and the potential growth rate. The following were among the points made.

The New Economic Growth Strategy was drawn up in June this year to act as a policy system for the achievement of new growth amid a declining population. It is a comprehensive strategy aimed at enhancing the country's ability to achieve economic growth through innovation in human resources, infrastructure, finance, technology, management capacity, etc. The Strategy estimates the annual real economic growth rate of 2.2% as attainable over the next 10 years.

In addition, the Economic Growth Strategy Outline, which was compiled by the ruling coalition drawing on the growth policies of government ministries, envisions annual real economic growth of at least 2.2%.

We considered the factors that accelerate the TFP growth rate and those that decelerate it, and examined the extent to which these may be achieved through actual policy implementation. The following are listed as accelerating factors, together with their contribution rates:

"Improving the efficiency of the service sector, such as healthcare service, welfare and education (approximately 0.4%)," "innovation through R&D (approximately 0.2%)," "investment in human resources (approximately 0.4%)," "international industrial strategy (approximately 0.3%)," and "stable monetary and fiscal policies (approximately 0.2%)." Thus, improving the efficiency of the service sector is considered to be critically important.

In order to consider the status of the service sector in the Japanese economy, we first made a comparison with the manufacturing industry. The service sector's share in the GDP shows its relative importance, and in the current decade, even narrowly defined service industries have a larger proportion than the manufacturing industry. Furthermore, the GDP elasticity of the service sector is rising, thus it is of greatest importance to increase the sector's productivity.

At the same time, the productivity of the service sector in Japan is low compared to that of the other OECD countries. Thus, this is a major issue to be addressed.

If we break down the growth rate in the New Economic Growth Strategy using the framework of growth accounting, the TFP growth rate will be approximately 1.3% p.a. for the next 10 years. The labor input is assumed to be slightly negative, even taking into consideration labor force participation of women and the elderly.

By way of reference, in a survey of the members of the Japanese Economic Association, we found that their average forecast for the TFP growth rate over the next 10 years was 1.2%, and the current estimate of 1.3% was considered to be attainable through policy efforts.

A topic for future discussion is the impact of the national burden ratio (tax burden + social security contribution) to national income on growth. There are a variety of arguments on this point, but the Annual Report on the Japanese Economy and Public Finance cites a cross-country analysis showing a rise of 1% in the national burden ratio lowers the potential growth rate by 0.1%.

A second point at issue is that the estimates in the New Economic Growth Strategy use current GDP statistics. There is another study that argues that the macro growth rate may differ significantly if possible increases in the quality of services, such as household durables and healthcare, are evaluated accurately.

Outline: FUWA Hisayoshi Presentation

Mr. Fuwa's presentation reported on the importance of innovation for sustained growth from a business standpoint. The following were among the points made.

We have been restructuring and reorganizing business operations for the past 10-15 years, and have now reached the stage of engaging in management aimed at promoting proactive strategies. In other words, we will transform our existing basic strategy and make a shift in the direction to enhance the following three areas: "human resource development," "new technology," and a "new business model."

To that end, we consider it essential to pursue the following four approaches: "responding to market changes," "utilizing winning technology," "concentrating resource input," and "forming external alliances."

To achieve sustained growth, it is vital to enhance efficiency at every stage of production, and two types of innovation, "value (product) innovation" and "process innovation," will be key. Innovation is also important for pursuing the two goals: one is to improve services from the viewpoints of safety, security, and reliability; and the other is to improve cost competitiveness. The first goal is sometimes inconsistent with the second one.

To utilize IT in innovation, it is necessary to standardize the entire process from the stage of identifying issues to the stage of implementing solutions. In addition, knowledge management, that is, the provision and sharing of individuals' knowledge and experience, is essential in streamlining this process.

By utilizing this knowledge management, we should aim for "value creation" to find new sources of profit, "motivation" to move towards the aggressive management we have pursued hitherto, and "stretch" to show an enhancement in competitiveness.

Ensuring that knowledge management is passed on fluidly to every stage of production is one of our next tasks. Knowledge and experience tend to create separate systems at each stage of production, which could lead to the loss of overall efficiency. Thus, it is necessary to share strategic value at every stage of production. The sharing of strategic value or collaboration while acknowledging differences in each other's functions (i.e., engaging in communication) is considered to be a potential strength that lies within the organizational structure of Japanese businesses.

Outline: Professor YOSHIKAWA Hiroshi Presentation

Professor Yoshikawa's presentation addressed the role of demand in economic growth. The following were among the points made.

We examined the medium-run outlook for economic growth. First, focusing on labor, as a factor of production, it is estimated that labor inputs will decline based on growth accounting analysis, but in 2005 there was an increase in female labor, causing the labor force to increase. Behind this is the fact that in the Japanese economy there is a tendency for female labor to diminish in times of recession and increase boom periods.

Looking at the economic growth rate, one factor contributing to growth was exports to Asian economies. However, endogenous factors, such as the increase in women's labor reflecting economic growth, also contributed. In view of this, it is possible to say that some of the factors contributing to economic growth are determined by demand factors.

As for factors that are constraining economic growth, one fundamental one is the saturation of demand for existing goods and services. Almost all goods and services are diffused in accordance with a logistic curve, and economic growth is constrained if these are saturated. The reverse of this is that the appearance of new goods has the effect of sustaining economic growth. In other words, product innovation could be said to be the ultimate source of economic growth.

Given how important the introduction of new goods is, we can also recognize the importance of changes in the industrial structure. With respect to the relationship between economic growth and the degree of change in the industrial structure, the rate of economic growth was high in the 1950s and 1960s, and the extent of change in the industrial structure was also considerable. Thereafter, with the maturity of the economy and the decline in the growth rate, the change in the industrial structure had become rigid.

Outline: Professor Dale W. JORGENSON Presentation

Professor Jorgenson's presentation built upon the three previous presentations and addressed views on future economic growth. The following points were made in the presentation.

Japan is currently shifting out of an era of deficient demand and into the beginning a new era, and growth is the focus of its new policy. The database to provide the basis for evaluating economic growth is of very great importance. If there is a problem in the statistical system at the national level, then the government will be unable to form the same perception of issues as we can.

In view of this, consideration should be given to having the perspective of the JIP 2006 database reflected in the system of national statistics. The New Economic Growth Strategy estimated the real GDP growth rate at 2.2%, but it may be a good idea to conduct future forecasts using the JIP 2006 database.

It is predicted that female labor force participation will increase in Japan, and I think in view of the high level of education of women in Japan, one should be optimistic about this.

The question of correctly evaluating the improvement of service quality within statistics is a near-intractable problem. I believe that in the fields of healthcare and education the reason for this is that market institutions are underdeveloped.

With respect to the role of demand in economic growth, product innovation is extremely important. The speed of product innovation in the IT sector will be the key to TFP growth. Nevertheless, TFP is only one factor in economic growth, and so we need to have a full discussion not only on that issue but also on labor input and capital input.

Comments from Session Chair, Professor NAGAOKA Sadao to the First Presentation

In the New Economic Growth Strategy, what is the outlook for investment?

The issue of the quality of services in healthcare and education is not necessarily reflected in the current GDP statistics. Thus, is it directly relevant to the 2.2% GDP growth rate target?

Reply by Mr. Morikawa

The New Economic Growth Strategy estimates the contribution of capital as just over 1.0%. In that event, the rate of return on capital will be similar to the current level. As for labor, the Strategy assumes that the participation of women and the elderly in the labor force will increase. For example, one premise is that the wage disparity between males and females will be eliminated by 2030.

What you point out is correct, though, if we consider affluence in real terms that is not necessarily reflected in GDP statistics, then improvement in the quality of healthcare is important. On the downside, since household production will decline as a result of women's participation in the labor force, the affluence currently not reflected in GDP may decline.

Comments from Professor Nagaoka to the Second Presentation

What are your views on the outlook for IT-related innovation?

And what are your thoughts on IT use in service industries?

Reply by Mr. Fuwa

As regards progress in the sphere of memory chips, the spaces between circuits are becoming narrower, and may well advance to the level of 20 nanometers in the future. And with regard to how IT will be used, I can envisage progress being made in the transmission and receipt of extremely fine images.

This could, for example, be used in the healthcare market for such purposes as exchanging high-definition MRI images. In addition, for this it is also necessary to increase storage capacity, and when this happens the measurement unit used will shift up from gigabytes to terabytes. I believe that as a result of this, the efficiency of communications will be enhanced.

I think that the creation of networks within limited communities will become necessary. Both service providers and on the other side the recipients of those services will enter those networks and interact within them. In healthcare services, for example, this may take the form of medical information being provided within specific frameworks, with the comments of doctors appended.

Comment by Professor Yoshikawa

The use of IT is not necessarily beneficial for every industry, but I feel that there is still scope for the effective use of IT in fields such as education and healthcare.

Comment by Professor Jorgenson

Only about 20%-25% of all industries utilize IT intensively, and there are still many industries that do not use IT. In that sense, IT is still relatively limited.

Questions and Comments from the Floor

Mr. Morikawa mentioned that the TFP estimate of 1.3% was ambitious, but that estimate includes contributions such as that from the quality of labor. Taking that fact into consideration, I feel that that is a very pessimistic estimate for TFP.

To evaluate past developments in Japan, it is necessary to analyze the 1970s, for example, but SNA statistics on a 93SNA basis do not go back earlier than the 1980s, so it is not possible to conduct comparative analysis using national statistics. In addition, there is a strong likelihood that the estimate of 1.0% for the 1980s may have undervalued the TFP growth at that time, because the real GDP statistics that Mr. Morikawa used were not prepared with a chain index. What is your view on these statistics-related problems?

One factor contributing to economic growth in the U.S. may be its immigration policy. In a similar vein, if Japan were to introduce an open-door policy, I feel that in particular the immigration of technicians and research scientists would raise productivity in the IT sector.

How should we think of the fact that the labor force participation rate increased despite the fact that the contribution of labor to growth was negative?

Reply by Mr. Morikawa

It is not that I perceive 1.3% as ambitious, but rather that that number is slightly higher than the 1.0% for the 1980s.

In the data for our research, chain values were used from 1994. Prior to 1994, we used fixed values. As regards SNA statistics, we also hope for improvement in the future.

Immigration policy is a political matter, and so is something I would rather not discuss, but insofar as it means the use of foreign human resources, this is already taken into consideration in the New Economic Growth Strategy.

As regards labor input, if things continue as they are it is forecast that the labor force will decline by four million people, but this decline can be checked and held to just one million if the labor participation rate by women and by the elderly rises.