In my last post on the policy agenda of Shinzo Abe, I took issue with both the Japanese prime minister’s choice of economic growth as almost the sole goal of government, but more importantly his ability to achieve such growth. Indeed, it is my contention that Japan has a post-growth economy, the principal reasons for which are twofold: demographics and diminishing returns to technology.
The above statement can be put in the context of growth accounting. From the OECD Compendium of Productivity Indicators 2012 we see a summary statement on growth drivers:
Economic growth can be increased either by raising the labour and capital inputs used in production, or by improving the overall efficiency in how these inputs are used together, i.e. higher multifactor productivity (MFP). Growth accounting involves decomposing GDP growth into these three components, providing an essential tool for policy makers to identify the underlying drivers of growth.
Next, let’s look at the headwinds to growth cited by the last governor of the Bank of Japan, Maasaki Shirakawa, who hardly ever stepped onto a podium to give a speech without including the following slide in his presentation pack (click for larger image):
As you can see from the chart above, labour inputs—the red section of each bar—have become a strongly (and increasingly) negative component of growth. The blue section of each bar—which encompasses both capital deepening and multifactor productivity (innovation and efficiency)—has also shrunk substantially.
So if Shinzo Abe wishes to bolster growth he has to do one of three things when he shoots his three policy arrows: 1) increase labour inputs, 2) expand capital inputs or 3) encourage multifactor productivity growth (innovation, creativity and organisational efficiency). Continue reading
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