September 4, 2003
Many believe that information technology in Japan lagged behind that of the US during the "lost decade" of the 1990s. They are mistaken. Harmonizing the statistics from both countries makes it clear that the contribution of IT to economic growth was about equal. Japan's weak economic growth rate is due to other factors: weak demand relative to supply, and a labor shortage. And these two issues will continue to dog Japan's economy.
Japan's average economic growth rate plunged from 4.1% in the 1980s to 1.4% in the 1990s. Growth for the first three months of this year was essentially zero, and the economy still trudges along. In contrast, the US economy prospered throughout the 1990s, especially in the latter half of that decade when growth was helped by an increase in productivity arising from investment in IT, spawning the idea of a "new" economy.
After the global downturn in the IT industry, US growth did fall in 2000, but according to the Bureau of Labor Statistics, productivity was as strong as ever. Despite skepticism about the new economy after the collapse of the dot-com bubble, the IT revolution was still alive.
During the latter half of the 1990s innovation quickened. According to the International Technology Roadmap for Semiconductors (ITRS), before 1995 the density of transistors in semiconductors had been doubling every 24 months. In the latter half of the 1990s, this rate moved to 18 months, and it was at this time that the Internet became ubiquitous.
We analyzed how the Japanese and US economies changed at this turning point. The average annual rate of US labor productivity in the years 1995-2000 rose by 0.74% compared with the period 1973-1995.
Labor productivity can be broken down into two components: capital per worker (or capital deepening) and total factor productivity. IT capital contributes a 0.50% share to the rise in capital deepening. If this is added to the 0.24% contribution by IT capital to the rise in TFP, the total is 0.74%. In sum, all growth in US labor productivity in the second half of the 1990s can be explained solely by IT.
What about Japan? According to a report by the OECD, Japan was slower than the US in its introduction of IT, and was held back as a result. But the OECD report uses the official statistics of each country without any adjustments to harmonize the statistics. So we developed a database of comparable data and discrepancies emerged. Above all, when performing analyses on IT, two points must be noted.
First, the US and Japanese definitions of software differ. Only custom-made software is treated as capital investment in Japan's GDP figure. Meanwhile, US calculations include custom-made software as capital investment, as well as packaged software, and software developed in-house. Japan's estimations of capital investment in IT are thus undervalued. Since investment in this sort of software was about ¥4 trillion in 2000, we calculate that close to 1% of GDP was underestimated.
Second, there are problems with the deflators for IT equipment. According to the official US and Japan computer-related statistics, from 1995 to 2000 US prices fell twice as fast as those in Japan. Differences in the method of compiling statistics may be to blame. If the rate of falling prices is slower, the growth of investment is also smaller, and the growth contribution by IT is therefore undervalued.
We corrected these discrepancies and compared the growth accounting decomposition between Japan and the US. First, the contribution of IT capital to growth in both countries in the latter half of the 90s was about the same, around 1%. That is to say, the opinion that Japan was lagging behind the US in IT investment is based entirely on differences in calculation of national statistics.
And, growth in TFP in the second half of the 90s can be seen in Japan, as in the US. In this way, although there was an enormous difference between the growth rate of the Japanese and US economies in the 90s on a macro level, the difference cannot be explained by capital deepening of IT capital or in the growth of TFP.
What explains the difference in growth rates? Non-IT-related capital stock and labor input. Labor input, in particular, shows a negative contribution to growth in Japan during the 90s. The cause: although the supply structure was getting more efficient, demand was not rising to meet it.
Efficiency gained by downsizing or restructuring is not the solution. Rather, productivity should be achieved through technological innovation--the development of new products. This year, Japan boosted tax incentives for research and development. Japan's failure to implement these kinds of policy measures during the 1990s may be one reason behind the lack of economic growth throughout the decade.
When the methods for calculating growth during the latter half of the 90s are harmonized, Japan grew at an annual rate of about 2.1%, half of which can be explained by growth in IT investment. In other words, the acceleration in the rise of Japan's productivity was for the most part supported by innovation in IT.
Because the climb in productivity depends on IT innovation, sustainability will be a big issue. As for integrated circuits, which are leading innovation in this field, the development of component technologies has become more difficult, and some believe that there will be a slowdown to the speed of pre-1995 days. Telecommunications are suffering from a similar problem. Although bandwidth is expanding, the development of content shows signs of reaching a bottleneck. Should IT innovation decelerate, its efficacy in propping up the long-term growth rate will weaken, through the decline in productivity of the macro-economy.
As for Japan's future growth rate, the state of labor input is of utmost importance. The estimations of the National Institute of Population and Social Security Research claim that Japan's labor force will peak at 68.7 million people in 2005 and then decrease to 62.6 million by 2025. This annual decrease in the population of about 0.5% will push the economic growth rate down by 0.3 percentage points. By contrast, using the figures of the US Census Bureau, increasing labor input in the US will push the country's GDP up at a rate of about 1% per year.
Japan's mid-50s baby boomers will depart from the working population over the next 20 years. In the long-term, the declining birthrate is the big issue. It is therefore necessary to reconcile the conflicting goals of increasing female job participation and slowing the declining birthrate. Strengthening the labor supply and promoting demand-arousing innovation will be absolutely crucial.
(A version of this article appeared in Japanese in Nihon Keizai Shimbun on July 3, 2003)
Dale W. Jorgenson
Professor, Harvard University
and
Kazuyuki Motohashi
Senior Fellow, Research Institute of Economy, Trade and Industry (RIETI) and
Associate Professor, Hitotsubashi University
Editor-in-Chief, Masato Hisatake
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: hisatake-masato@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416
RIETI invites you to visit its English website
[http://www.rieti.go.jp/en/index.html].
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
