RIETI Report July 2003

Importance of Human Resources for Japanese Economic Growth
<RIETI Featured Fellow> MOTOHASHI Kazuyuki

Greetings from RIETI

Good news for study of the English language this month as sales of the new Harry Potter book went beyond all expectations. Apparently, many international fans cannot wait for the book to be translated into their own language, and are reading it in English just to find out what happens. English Literature has not seen such excitement since the days of authors like Charles Dickens, whose serialized works were released monthly to enormous popularity. "The Dunciad" ("Science groans in Chains, / And Wit dreads Exile, Penalties, and Pains"), written by the legendary 17th century poet Alexander Pope, was so popular and difficult to buy that people would borrow a friend's copy and learn it by heart. No matter what televisions and computers have to offer us, at least there is still proof today that you can't beat a good story for holding people's attention. In making good books, it is not the printing press that matters, but the mind that wrote it - the human resources. RIETI Report had the pleasure of speaking with Dr. Motohashi about the mid-term results of a project he is currently undertaking, revolving around an international comparison of productivity among Pan-Pacific countries. (DC)

RIETI FELLOWS NOW

Kazuyuki Motohashi
Dr. Kazuyuki Motohashi has been a senior fellow as well as senior manager of Quantative Studies at RIETI since April 2002. At the same time, he has also held the position of associate professor at the Institute of Innovation Research in Hitotsubashi University. After receiving an MEng from the University of Tokyo in 1986, he joined MITI and served in several high-level capacities, including Deputy Director of Planning Division in the SME Agency, and Head of Public Affairs Office in the Trade Policy Bureau. He earned an MBA from Cornell University in 1993, and a Ph.D. in Business and Commerce from Keio University in 2000. His major publications include: "Changing Nature of Japanese Firm?: Technology Adoption, Organizational Structure and Human Resource Strategy," Micro- and Macrodata of Firms: Statistical Analysis and International Comparison (S. Biffignandi ed. 1999, Physica-Verlag, New York); and "Innovation Strategy and Business Performance of Japanese Manufacturing Firms," Economics of Innovation and New Technology (vol. 7, 1998).

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Interview

The Importance of Human Resources for Economic Growth in Japan

RIETI Report: Dr. Motohashi, you are currently conducting a project at RIETI entitled "International Comparison of Productivity Among Pan Pacific Countries," [PDF:123KB] otherwise known as ICPA. Could you fill us in on the background of this project?

Motohashi: Well, ICPA is designed to compare changes in economic structures and total factor productivity (TFP). TFP is a concept often used in economic studies on technological change, because it measures final output per unit of all inputs, thus doing away with the difficult and often ambiguous task of dealing with the individual productivity of every differing input. With ICPA, we are focusing on comparing the economic trends in and rate of productivity of Asia-Pacific countries (including Japan, South Korea, China, Taiwan and the US), from the 1980s onwards. The final report of the project, which will further compare productivity levels in assessing each country's industrial competitiveness, is due to be compiled next year. The ICPA project is, in part, owing to the findings of another RIETI project called "Economic Growth in Japan and the United States in the Information Age," [PDF:266KB] which I have been conducting in cooperation with Prof. Dale W. Jorgenson of Harvard University. The view that the Japanese economy lost its competitiveness in the international market in the 1990s is prevailing; we've all come across journalistic opinion which argues that Japan is significantly lagging behind the US in the IT revolution, or that China's rapid expansion into the world market is becoming a threat to the Japanese economy. As an economist, I felt a strong need to reassess the competitiveness of Japanese industries, through empirical studies which focused on productivity; and this became the primary motive for undertaking the project. Of course, the overall objective is to re-evaluate the competitiveness of Asia-Pacific countries from the 1980s onwards, but in doing so, it is hoped that TFP analysis will lead to a proper understanding of the principal factors which have been responsible for the decline in Japan's strength.

RIETI Report: What have the findings of the project told you so far?

Motohashi: An interim report on the results of ICPA was presented at a RIETI-Keio Conference held in May this year, and all I can give you today is a tentative conclusion. The final report of the project will cover both analyses of growth accounting and growth level, but I'll only be talking about the former today. The results show that there has been no noticeable gap in total factor productivity growth (TFPG) between Japan and China, nor between Japan and the US throughout the 1990s. When people emphasize the decline in Japan's economic competitiveness, compared to China and the US, they are often only looking at the GDP growth rate. While it is true that Japan's economic growth rate hovered around 1.4% in the 1990s, far less than the US rate of over 4% and dramatically beneath that of China's 7-8%, if one compares the TFPG rate a different picture can be seen. According to TFPG calculations, all three countries have remained in competition with each other, with the growth in total factor productivity staying around less than 1% in the case of each country. This result has various implications. TFP measures the technical efficiency of production, which is the sustainable and structural part of economic growth. Therefore, the fact that Japan maintains a TFPG which is on a par with the US and China implies that we should not be pessimistic about Japan's potential economic growth in the future, in spite of the low economic growth rate throughout the past decade. China's rapid growth was caused by its comparative advantage rather than its technical innovation, and so may just be a fleeting phenomenon.

RIETI Report: A report by the Organisation for Economic Co-operation and Development claims that Japan is dragging its heels behind the US as regards progress in the introduction of IT, thus limiting its impact on economic growth. What is your opinion on the relationship between the IT revolution and economic growth?

Motohashi: The claims of the OECD report are based on official statistics published individually by the US and Japanese governments, and thus do not take differences in datasets into consideration. In analyzing the influence exerted by IT on the economic growth of the US and Japan, Prof. Jorgenson and I compiled our own database of figures that could be compared. Although the GDP statistics of both Japan and the US abide by 93SNA (System of National Accounts, standards laid down by the UN in 1993), several discrepancies in the application of the concept exist between the two countries. Most particular of these are differences in the definition of software and method of calculating IT prices, all of which leads to an underestimating of Japan's IT investment; thereby bringing down estimates of Japan's GDP growth rate for the late 90s by 0.5%. After first calibrating the GDP estimates to accommodate for these discrepancies, and then comparing them, we found that while from a macro perspective there is a big gap in the growth rate of the US and Japanese economies in the 1990s, from the perspective of IT capital, no difference can be found in either the growth of capital deepening (capital input per hour worked), nor in the growth of TFP. We reached the conclusion that the contribution of IT to both output and input of economic growth in the US and Japan was about the same throughout the 1990s; therefore the differences in economic growth that do exist, in our opinion, bear little relation to IT.

RIETI Report: Then what can explain the large gap in the economic growth rate of the US and Japan? Furthermore, how do you think this gap can be closed, considering the results of the two projects that you are involved with?

Motohashi: Factors pertaining to capital and labor input are responsible for the difference in economic growth. The latter of them is the most important to take into consideration as regards the future of the Japanese economic growth rate. According to the statistics of the National Institute of Population and Social Security Research, the labor population of Japan will, after a peak of 68,700,000 people in 2005, begin to fall at an annual rate of 5% and decrease to 62,600,000 by 2025. This decrease in the size of labor input will drive the economic growth rate down at an annual rate of 0.3%. As for the US, calculations based on estimations of the US Department of Commerce's Consensus Bureau predict that rising labor input will push the GDP up at an annual rate of 1%. Compared to the US, in Japan's situation, the development of human capital will become increasingly important. The IT revolution brings with it not only new technology but new skills, and the demand for high-skilled workers will increase, while the need for low-skilled workers will fall. One only has to think of the tens of thousands of telephone operators who lost their jobs following the development of the electronically-operated exchange system. On the other hand, there are only tens of skilled specialists in the IT departments of large commercial banks, and the demand for them is ever-increasing. The difference in marginal productivity between low- and high-skilled workers has widened dramatically, and Japan's future economic growth will largely depend upon how successful the country is in nurturing the latter. A factor of great importance that is brought to light by the study of TFP is human capital development. No matter how huge an investment is made into Research and Development, neither innovation nor an increase in the growth of total factor productivity can be achieved without the input of excellent human resources.

EVENTS INFORMATION

Brown Bag Lunch Seminars

7/31 Speaker: Yoichi Funabashi (Senior Columnist, Asahi Shimbun)
Commentator: Fumiaki Kubo (Professor, Faculty of Law, The University of Tokyo)
Moderator: Michael Yoo (RIETI Research Associate)
"Security in Asia"

7/29 Yoshio Okubo (Director, The Yomiuri Shimbun)
Jun Iio (RIETI Faculty Fellow/Professor of Government, National Graduate Institute for Policy Studies)
"Outlook for the Coming LDP Presidential Election and the Next General Election"

7/23 Speaker: Akihiro Sawa (RIETI Consulting Fellow/Director, Policy Planning Division, Natural Resources and Fuel Department, ANRE)
Moderator: Masato Hisatake (RIETI Director of Research and Senior Fellow)
"University Reform Under the New Law (Kokuritsu Daigaku Hojin-Ho)"

7/22 Speaker: Masayoshi Honma (RIETI Faculty Fellow/Professor, Graduate school of Agricultural and Life Sciences, The University of Tokyo)
Moderator: Ichiro Araki (RIETI Faculty Fellow/Associate Professor of Yokohama National University)
"The WTO Agricultural Negotiations and the Essence of Agricultural Issues"

Research Seminars

7/31 Yoshinori Yokoyama (Senior Fellow, RIETI)
"Development of Tools for Social System Design - An Example of Housing Supply System"

7/24 Kazunari Kainou (Fellow, RIETI)
"Development of multi-sector general equilibrium model for policy evaluation; Development and analysis application of the government budget module of the model"


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This month's featured article

Importance of Human Resources for Japanese Economic Growth
<RIETI Featured Fellow> MOTOHASHI Kazuyuki

MOTOHASHI KazuyukiFaculty Fellow, RIETI

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