Transcript relatively

Could Korea face a Japan-like
“Lost Decade” in the coming
years?
Jacob Loree, Scott Stroughan, Yarui
Wang, Yuxi Liu
Introduction
•From the 1950’s to the 1980’s Japan
was considered an “economic miracle”
•Experienced double digit economic
growth year-by-year
•Became the second largest economy
in a very short period of time
Introduction
•However, in the 1990’s, the Japanese economy
stagnated and began what is known as the “Lost
Decade”
•Very little economic growth per year
Some negative growth years
•This has turned into the “Lost Double Decade”
Reasons
Fundamentally our view is that sustainable
high level growth in Japan ended after
achieving some rough level of convergence,
but was extended through credit and macro
policy. Eventually this bubble burst leaving
Japan with a financial crisis, which led to a
“Lost Decade”.
l
Reasons
•The reason Japan took so long to recover from
its crisis and stagnated can be explained by many
different theories.
•-asset bubbles and zombie banks
•-appreciation of its currency
•- a tightening of monetary policy
•-or more long-term deficiencies such as
technology or demographics.
Korea
•Korea is one of the “Asian Tigers” of economic
growth
•One of the fastest growing economies from the
1970’s onwards
•One of the largest importers/exporters in the
world
Korea
•However, there is growing concern that Korea
could face a similar stagnation as Japan in the
1990’s
Asset bubbles, banking issues, etc.
•To investigate the similarities and differences in
these countries, we can look at economic
modelling.
Making Comparisons
•We can compare Solow model of both
countries to better understand their economic
fundamentals and determine their projected
growth rates.
•We can also compare the gap between
expected and actual growth rates.
•Check to see if Korea has attained convergence.
Solow Model
 Y=A+K^α+L^β
 Focuses on savings, population growth, and
capital per worker
 Steady state equilibrium
 Model forecasts a “convergence” among all
countries
Solow Model
 The most important factor of production, however,
is technological innovation
 “A”
 This shifts the Solow curve upwards, allowing the
steady state to be further out
 Does present-day Korea and 1990’s-era Japan have
significantly different technological innovation
levels?
Solow Model
 However, how “A” is defined differs from
economist to economist
 Some look at technology as a whole, while
some use it as a “catch-all” of everything not
contained by K and L
 Solow Residual
Capital and Labour
 The two countries have relatively similar capital and
labour growth rates.
 Capital growth rates are extremely similar, with
trends moving in the same direction
 Labour growth rates differ slightly more, but the
coefficient is so small, that the graph overstates the
differences
Differences in Japan and Korea’s
Solow Model




Japan (1990-2000)
logGDP=5.6734+ 0.1856K-0.1684L
Korea(2000-2010)
logGDP=6.1128+ 0.2213K -0.0329L
 Very similar Solow models
Solow Model
 According to the Solow model, we would expect
Japan’s GDP to grow by 0.18% per 1% increase in
capital, and decrease by 0.16% per 1% increase in
labour
 Did this actually come true with the data we now
have?
Japan Results





From 1990-2000:
GDP grew a total of 7%
Capital grew a total of 0.61%
Labour force grew a total of 5.84%
According to Solow, GDP should have contracted by
0.82%
Growth Accounting Model
 Using the data from 1990-2000, we know GDP grew
7%, K grew by 0.61%, and L grew by 5.84%
 Using the Growth Accounting coefficients of α=0.33
and β=0.66 we see that A grew by 2.94%
 Significant portion of growth
Differences between Japan and
Korea
 Obvious difference between theory and reality when
looking at K and L
 While K and L may be similar for the two countries,
the more important question is how do their
demographics, political economy, and culture match
up?
 These all are a part of “A” and help determine total
output of both countries
Demographics
Demographics
(South Korean Demographic Pyramid)
From: http://www.indexmundi.com/graphs/population-pyramids/south-korea-population-pyramid-2013.gif
Demographics
(Japanese Demographic Pyramid)
From http://www.japanfocus.org/data/j.pop.pyramid2003.gif
Immigration
Immigration
Japan
Korea
Serious
Racism
No Serious
Racism
Anti Immigrant
Policy
"There are more
than one million
immigrants
workers
in South Korea"
(South Korean
Ministry of Justice)
"65% respondents
were opposed to
relax the restriction
in terms of
immigration policy"
(Asahi News, 2010)
Create a buffer
against the low
fertility rate
Technology
 Japan and Korea are very different in how they deal
with technological innovation
 Japan, almost exclusively, imports new technology
from the United States
 Korea, however, has started to shift towards
producing in “high-tech” industries, to avoid
reliance from imports
Technology
Compared with
Japan, South Korea‘s
high-tech
manufacturing
accounts for larger
proportion in the
whole industry .
Technology
Technology
 Japan- “a middle man economy”
Japan was the single largest consumer of U.S.
technology, Japan’s share of U.S. receipts was
approximately 51% in 1990. 35% in 2000.39% in 2001.
( Japan lacks innovation on the fundamental technology)
 Risk: Korea is trying to snatch the role of the middleman
for the U.S. in the U.S.-East Asia Supply Chain.
Conclusion
 Korea won’t face the “lost decade” like Japan.
 Capital and Labour-relatively similar
 Demographics-immigrations(Japan has a stronger
anti-immigrant bias)
 Technology-Japan imports from US-Korea avoid the
reliance on US