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“Information Technology and the Japanese Economy”

Table 4 Table 4Last time, we read a paper by Robert Gordon on the historical trends and future perspectives of the U.S economic growth. In his paper, Gordon asserts that the Third Industrial Revolution (IR#3) which transformed our lives with computers, webs, and mobile phones only resulted in a short-lived growth revival between 1996 and 2006. But what about other countries? For instance, how much benefits did Japan-arguably one of the most high tech countries in the world-reap from #IR3? Dale Jorgenson and Kazuyuki Motohashi investigate this very question in their paper “Information Technology and the Japanese Economy”.
Since the “bubble economy”of the 1980s, the once-thriving economy of Japan has been mired in the slump. Many economists have asked a question similar to Gordon’s own: “is Japanese economic growth over?” In order to test whether Japan has failed to achieve a productivity growth from IT advancement, Jorgenson and Motohashi compare the sources of gross domestic products of the Japanese and U.S economy.

As can be seen from the two tables above, the Japanese economy has been gradually shrinking for the past decades. Despite some downturns from the mid 70s to 80s, the U.S economy has been growing steadily since the mid ’90s.

What we want to focus on in this table is the variable “contribution of information technology”. For Japan, the IT contribution is the lowest 1990 to 1995 (0.22). Consequently, the total factor production during these years is the lowest among the four time periods. Quite contrary, the contribution of IT to the U.S economy has continued to increase over time. This comparison clearly shows two things; 1.the early 21st century brought the biggest economic revival in both U.S and Japan (this confirms Gordon’s finding about the U.S economy during IR#3), and 2. In the 90s, Japan did not invest as much in IT industry as the U.S did (the former only re-started investing vigorously in 1995-2003 when the Japanese price of IT goods and services fell relatively faster than the U.S price).

Concerning the future economic growth, Jorgenson and Motohashi predict that Japanese economy will lag behind that of America. This is particularly because the contribution of labor services to Japanese economy is diminishing at an alarming rate. Demographically, Japan is quickly becoming an aging country. On the other hand, the U.S is one of the few developed countries whose population is still rising (mostly due to immigration as Professor Smitka noted during the last lecture).

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One Comment

  1. This is a good overview, particular in placing this in context.

    Note that the “Implied IT-related TFP contribution” is roughly the same as the base case “Other TFP contribution” in both Japan and the U.S. However, for Japan in particular TFP growth (the top tables) has fallen by over 1.0 percentage points (and because growth rates compound — remember our “rule of 70” — that matters). It’s a bit harder to pull the comparable data out of their projections. If we compare the US base with the Japan base cases, we have IT + non-IT TFP = 0.37 + 0.38 = 0.75 for the US and 0.34 + 0.33 = 0.67 for Japan. In the optimistic case it’s .84 for Japan and .99 for the US. Small, but if we subtract off hours growth we get (base case) 1.96% growth for Japan and 2.21% growth for the US [bottom tables, 2nd line]. Compound for 10 years and we get 21% growth in Japan and 24% growth in the US. The difference is insignificant, given the accuracy of the data. In other words, their bottom line is that they expect comparable performance across economies. (Note that, given falling population in Japan and rising population in the US, total GDP growth looks quite different [the top line]: over 10 years Japan will expand 16% and the US 33%.

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