Could Korea face a Japan-like “Lost Decade” in the coming years?

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”.

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 "65% respondents were opposed to relax the restriction in terms of immigration policy" (Asahi News, 2010) Japan Serious Racism Anti Immigrant Policy "There are more than one million immigrants workers in South Korea" (South Korean Ministry of Justice) Create a buffer against the low fertility rate Korea No Serious Racism

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 proportionin the whole industry .

Technology

Technology Japan-“amiddlemaneconomy” JapanwasthesinglelargestconsumerofU.S.technology, Japan’sshareofU.S.receiptswasapproximately51%in1990.35%in2000.39%in2001. (Japanlacksinnovationonthefundamentaltechnology) Risk: Korea is trying to snatch the role of the middleman for the U.S. in the U.S.-East Asia Supply Chain.

Conclusion Koreawon’tfacethe“lostdecade”likeJapan. Capital and Labour-relatively similar Demographics-immigrations(Japan has a stronger anti-immigrant bias) Technology-Japan importsfromUS-KoreaavoidtherelianceonUS

Could Korea face a Japan-like “Lost Decade” in the coming years?