DP
RIETI Discussion Paper Series 09-E-021
Estimates of Multifactor Productivity, ICT Contributions
and Resource Reallocation Effects in Japan and Korea
FUKAO Kyoji
RIETI
MIYAGAWA Tsutomu
RIETI
Hak K. PYO
Seoul National University
Keun Hee RHEE
Korea Productivity Center
The Research Institute of Economy, Trade and Industry
http://www.rieti.go.jp/en/
RIETI Discussion Paper Series 09-E-021
Estimates of Multifactor Productivity, ICT Contributions and
Resource Reallocation Effects in Japan and Korea
April 2009
Kyoji Fukao
Hitotsubashi University and RIETI
Tsutomu Miyagawa
Gakushuin University and RIETI
Hak K. Pyo
Seoul National University
Keun Hee Rhee
Korea Productivity Center
*We acknowledge the research efforts made by the Japan Industrial Productivity (JIP)
Database Project Team and the Korea Industrial Productivity (KIP) Database Project
Team through joint workshops in Fukuoka in 2005 and in Tokyo and Seoul in 2007.
Please use k.fukao@srv.cc.hit-u.ac.jp and pyohk@plaza.snu.ac.kr for correspondence.
Abstract
As the studies of Krugman (1994), Young (1994), and Lau and Kim (1994)
showed, the East Asian economic miracle may be characterized as `input-led' growth.
However, both the stagnation in investment and the decrease in average working hours
combined with a decrease in the fertility rate require a productivity surge for renewed,
sustainable growth in East Asia. The purpose of our study is to identify the sources of
economic growth based on a KLEMS model for Japan and the Republic of Korea,
which experienced a “Lost Decade” and a financial crisis in 1997-1998, respectively.
We report estimates of multifactor productivity in the market economy of Japan and
Korea based on the dataset of a 72-industry classification following EU KLEMS project
guidelines. We also identify the contributions of ICT assets and resource reallocations
in two economies. Both economies have strong ICT-producing sectors but relatively
weaker ICT-usage effects. Lower productivity in service industries due to excessive
regulations and lack of competition in public service sectors seem to have worked
against enhancing ICT-usage effects and finding renewed sustainable growth paths. The
resource reallocation effects of capital input in both Japan and Korea were either
negligible or insignificant, while those of labor input (the labor shift from lower wage
industries to higher wage industries) were positive and significant. Therefore, a series of
productivity-enhancing policies designed to promote reallocation of capital input seems
crucial for both economies to resume sustainable growth paths.
Keywords: MFP, Resource reallocation, ICT
JEL Classification numbers: O30, O47, O57
1
1. Introduction
As the studies of Krugman (1994), Young (1994), and Lau and Kim (1994)
showed, the East Asian economic miracle may be characterized as 'input-led' growth.
However, both the stagnation in investment and the decrease in average working hours
combined with a decrease in the fertility rate require a productivity surge for renewed
sustainable growth in East Asia. The purpose of our study is to identify the sources of
economic growth based on a KLEMS model for Japan and the Republic of Korea
(hereinafter called Korea), which experienced a “Lost Decade” and a financial crisis in
1997-1998, respectively. We report estimates of KLEMS inputs, gross output and
multifactor productivity in Japan and Korea based on the dataset of a 72-industry
classification following EU KLEMS project guidelines. We also identify the
contributions of ICT assets and resource reallocation effects in two economies. We have
found that the slow-down of MFP was a main factor behind Japan’s Lost Decade. In
Korea's late-stage industrialization we have also found that its catch-up process with
industrial nations has been predominantly input-led and manufacturing-based, as
documented in both Timmer (1999) and Pyo (2001). However, the sources of growth in
the two economies seem to have switched from input-led growth to MFP-growth by the
introduction of ICT-intensive production and service industries. Both economies have
strong ICT-producing sectors but relatively weaker ICT-usage effects. Lower
productivity in service industries due to excessive regulations and the lack of
competition in the public service sectors of the two economies seem to have worked
against enhancing ICT-usage effects and discovering renewed sustainable growth paths.
The resource reallocation effects of capital input in both Japan and Korea were either
negligible or insignificant while those of labor input (the labor shift from lower wage
industries to higher wage industries) were positive and significant, implying that more
structural adjustments in capital inputs are needed in both economies.
The purpose of this chapter is to provide estimates of a 72-industry level
multifactor productivity in Japan and Korea by following the guidelines of the database
of the EU KLEMS project in a gross-output growth accounting framework. We have
used a 72-sector industrial classification for future comparability with EU member
countries and non-member countries including the United States. An analysis based on
detailed industrial classification gives us better views on productivity and growth,
which is difficult to grasp in broader industrial classifications. Industries in an economy
have shown different productivity trends, growth patterns and resource reallocation
effects according to their production characteristics, competition policies and other
economic and non-economic circumstances.
2
KLEMS is a particular kind of gross output growth accounting model in which
output is measured by gross output and inputs are decomposed by capital (K), labor (L),
energy (E), material (M), and service (S). Since this methodology is basically based on
gross output, it has the advantage of separating effects of intermediate inputs from other
inputs on productivity, therefore allowing productivities by industry to be more accurate.
Moreover, the assumption of a real value-added production function (separability
assumption) is not usually guaranteed,1 which also gives legitimacy to gross output
growth accounting. However, gross output growth accounting requires more
information on intermediate inputs than value-added growth accounting. Therefore, the
data structure for estimating productivity has to be consistent with not only national
income accounts but also input-output tables. Use and Make Matrix etc. and the
estimation methodology for unavailable data should be examined more carefully.
This paper is organized as follows: Section 2 examines estimates of 72-industry
level multifactor productivity of Japan and Korea by following the guidelines of the
database of the EU KLEMS project in a market economy accounting framework;
Section 3 identifies the contribution of ICT capital accumulation in recent economic
recoveries of Japan and Korea; Section 4 provides estimates of resource reallocation
effects in both Japan and Korea; and the final section concludes.
2. Growth Accounting and MFP Growth
2.1 Overview of growth accounting for Japan and Korea in comparison with the
major economies in the EU and the U.S.
We first report the results of growth accounting for Japan and Korea and compare
them with the major EU economies (Germany, France, the United Kingdom and Italy),
and the U.S. in Table 2-1.2
1
See Berndt and Christensen (1973, 1974), Berndt and Wood (1975), Denny and Fuss (1977) and
Yuhn (1991) for the U.S., and Pyo and Ha (2007) for Korea.
2
The growth accounting analysis for the Japanese economy in this section is based on the EU
KLEMS Database, March 2007. For details regarding this database see Timmer et al. (2007).
3
Table 2-1 Growth Accounting for the Market Sector in Japan, the US, and the Major EU
Economies
Contribution of
Contribution of
labor input growth capital input growth
1980-95
Japan
3.9
0.4
2.0
Korea
9.5
2.2
5.6
Germany
1.9
-0.2
1.2
France
1.8
-0.1
0.7
UK
2.5
-0.3
1.2
Italy
1.9
0.3
0.8
US
3.0
1.2
1.1
1995-2005
Japan
1.0
-0.5
1.1
Korea
4.8
0.7
5.1
Germany
1.0
-0.4
1.0
France
2.4
0.7
0.9
UK
3.2
0.8
1.5
Italy
1.2
0.8
1.0
US
3.7
0.7
1.3
Source: EU KLEMS Database, March 2008.
Country
Gross value added
growth
Contribution of
MFP growth
1.5
1.8
0.8
1.2
1.5
0.8
0.7
0.5
-0.9
0.4
0.8
0.9
-0.7
1.7
Table 2.1 shows the growth accounting results for the market sector of these
countries for the periods, 1980-1995 and 1995-2005. Although Korea’s economic
growth slowed down significantly after the financial crisis of 1997, the country
nevertheless recorded the highest growth among the seven countries in both periods.
The figure shows that Japan experienced a severe stagnation during the latter period,
and of the countries considered here registered the second highest annual rate of growth
(3.9%) in 1980-95, but the lowest rate (1.0%) in 1995-2005. Germany experienced a
mild slowdown in economic growth from 1.9% to 1.0%.3 The other four countries
(France, the UK, Italy, and the U.S.) saw economic growth accelerate after 1995. The
average growth rate for the four countries rose from 2.3% in 1980-95 to 2.6% in 19952005.
In Japan, three factors contributed to the slowdown in growth in the market
sector: the deceleration in MFP was responsible for 36% of the slowdown, while the
negative contribution of capital accumulation and the decline in the contribution of
labor input growth each accounted for 32% of the slowdown.
Looking at the factors contributing to the slowdown in growth in the market
sector of Korea’s economy, the most important factor is the decline in the contribution
of MFP growth. Of the 4.7 percentage-point decline in the growth rate of Korea’s
market sector from the earlier period (1980-1995) to the latter period (1995-2005), 57%
was accounted for by deceleration in MFP growth. The slowdown in the contribution of
3
The EU KLEMS data on Germany for years before Germany’s unification include East Germany.
4
labor input growth accounted for 32% of the decline of Korea’s growth rate. The
contribution of capital input growth did not decline substantially.
In both Japan and Korea, the most important factor contributing to the slowdown
of economic growth was the deceleration in MFP growth. In a comparison over the two
periods, Korea’s average MFP growth rate dropped by 2.7 percentage points from
+1.8% in 1980-95 to -0.9% in 1995-2005, while in Japan the MFP growth rate dropped
by 1.0 percentage point, from 1.5% in 1980-95 to 0.5% in 1995-2004. Turning to MFP
growth in the four major EU economies, a similar slowdown can be observed. Taken
together, the combined MFP growth rate of the four major economies declined 0.8
percentage point from 1.1% in 1980-95 to 0.3% in 1995-2005. Thus, among the six
major developed economies, the U.S. is exceptional in the acceleration in MFP growth
that it experienced.
Figure 2-1 Growth Accounting for the Market Sector in Japan and Korea in Comparison with Major EU Economies and
U.S.
1995-05
1980-95
10.0
10.0
8.0
8.0
6.0
6.0
annual average, %
4.0
4.0
Contribution of
capital input
growth
US
Italy
UK
France
Germany
Korea
US
-2.0
Italy
-2.0
UK
Gross value added
growth
France
0.0
Germany
0.0
Japan
Contribution of
labor input growth
Korea
2.0
2.0
Japan
annual average, %
Contribution of
MFP growth
Source: EU KLEMS Database, March 2008.
There is a stark difference in the causes underlying the acceleration in growth in
France, the UK and Italy on the one hand, and the US on the other. In the three EU
countries, the acceleration in economic growth was mainly achieved through labor input
growth. As Figure 2-2 shows, the increase in labor input growth in Italy did not take the
form of improvements in labor quality but of increases in total hours worked. In contrast,
5
in the case of the UK and France the quality of labor input improved substantially. Until
1995, these three countries suffered high unemployment rates, especially among lesseducated young people, but subsequently succeeded in creating more jobs for the
unemployed. The average of the standardized unemployment rate of the three countries
declined from 11.3% in 1995 to 7.4% in 2004. On the other hand, the standardized
unemployment rate in Japan increased from 3.1% to 4.7% during the same period
(OECD 2006). In contrast to the three EU countries just mentioned, the main cause of
growth acceleration in the U.S. was an increase in MFP growth (from 0.7% in 1980-95
to 1.6% in 1995-2004).
Figure 2-2 Contribution of Labor Input Growth: Japan and Korea in Comparision with Major EU Economies
1995-05
2.5
2.5
2.0
2.0
1.5
1.5
annual average, %
1.0
0.5
1.0
of which: Total
hours worked
0.5
Contribution of
labor input growth
-0.5
US
Italy
UK
France
Germany
US
Italy
UK
France
Germany
Korea
Japan
-1.0
Japan
0.0
0.0
-0.5
of which: Labor
composition
Korea
annual average, %
1980-95
-1.0
Source: EU KLEMS Database, March 2008.
As Figure 2-3 shows, in Japan there was a large decline in the contribution of
capital accumulation to economic growth. The contribution of capital accumulation also
declined slightly in Korea and Germany. In contrast, in each of the other four countries
the contribution of capital input growth increased. The U.S. and the UK In particular
experienced an acceleration in capital accumulation. This capital deepening in the two
countries was caused by the rapid accumulation of ICT capital (Figure 2-3).
6
Figure 2-3 Contribution of Capital Input Growth: Japan, the US and the Major EU Economies
1995-05
of which: ICT
capital
2.0
2.0
Contribution of
capital input
growth
1.0
1.0
0.0
0.0
US
Italy
UK
France
Germany
Korea
US
3.0
3.0
UK
of which: Non-ICT
capital
Italy
4.0
France
4.0
Germany
5.0
Japan
5.0
Korea
6.0
annual average, %
6.0
Japan
annual average, %
1980-95
Source: EU KLEMS Database, March 2008.
To sum up the above analysis, it is not the gap in MFP growth but differences in
factor input growth that caused the large difference between the economic growth
performance of France, the UK and Italy on the one hand and Japan on the other in the
period after 1995. The four major EU economies (Germany, France, the UK and Italy)
and Japan experienced a slowdown in MFP growth of a similar magnitude after 1995,
while Korea suffered a much larger decline. Thus, the U.S. is the exception with its
acceleration in MFP growth.
Figure 2-4 compares industry level MFP growth in the seven countries before and
after 1995. Beginning with the electrical machinery, post and communication sector
(ICT producing sector), we find that Korea still had the second-highest MFP growth in
the period after 1995, trailing only the U.S. The ICT-producing sector is the leading
sector for enhancing productivity growth in Korea, and as shown in Table 3-2 and
analyzed in detail by Ha and Pyo (2004), the input of ICT capital services in the ICT
sector has increased greatly since 1995. On the other hand, Japan’s MFP growth in the
ICT-producing sector after 1995 declined to the mid-range level among the seven
economies. Both in Korea and in Japan, MFP growth in this sector is relatively higher
than that in the other five sectors. However, the problem for both Korea and Japan is
that, like in other countries, the share of this sector in the overall economy is not very
7
large. The average share of labor input (hours worked) in this sector for Korea’s and
Japan’s total labor input in 1995-2005 was 4.7% and 4.3% respectively. In the U.S., this
share was 3.2%.
Figure 2-4 MFP Growth in the Market Sector: by Sector and by Country
Manufacturing, excluding electrical machinery
Electrical machinery, post and communication
3.0
3.0
10.0
9.0
Other goods-producing industries
2.5
2.0
8.0
2.0
1.0
0.5
1995-2005
3.0
-1.0
1995-2005
US
UK
Italy
France
Germany
-1.0
US
UK
Italy
France
Germany
Japan
Korea
0.0
Japan
-0.5
1.0
Korea
0.0
2.0
1980-95
0.0
US
1995-2005
UK
1980-95
Italy
1.0
France
4.0
1980-95
Germany
5.0
Japan
1.5
6.0
Korea
7.0
-2.0
-1.5
-3.0
Other goods producing industries
Finance and business services
Distribution services
Personal and social services
1.5
4.0
4.0
1.0
3.0
3.0
0.5
2.0
-4.0
-1.0
US
Italy
UK
France
Korea
Japan
1980-95
1995-2005
-1.5
US
Italy
UK
France
-1.0
-0.5
Germany
1995-2005
0.0
-3.0
-5.0
1980-95
1.0
Germany
1995-2005
Japan
US
Italy
UK
France
Japan
Korea
Germany
-2.0
1980-95
Korea
0.0
-1.0
0.0
2.0
1.0
-2.0
-2.5
-3.0
-2.0
Source: EU KLEMS Database, March 2008.
The largest declines in MFP growth in Japan occurred in distribution services
(retail, wholesale and transportation) and in the rest of the manufacturing sector (i.e.,
excluding electrical machinery). The labor input shares of these two sectors were 23.4%
and 16.8% respectively. Korea experienced a severe slowdown in MFP growth in all
sectors except the ICT-producing sector. In the case of Korea, we observe that the
estimated MFP growth rates in manufacturing in general are greater than in services.
This may be due to the fact that innovations such as product innovation or process
innovation are more common in manufacturing than in services. Also, R&D investment
for innovation is in general more intensive in manufacturing than in services. This may
explain why MFP growth rates in manufacturing are greater than in services.
The highest MFP growth among the seven countries in almost all sectors was
recorded by the U.S. In comparison to the U.S. and the major EU economies except
8
Italy, both Korea’s and Japan’s MFP growth in 1995-2005 in manufacturing excluding
electrical machinery was low. MFP growth in personal and social services stalled in all
of the countries examined here except France. Moreover, with the exception of the U.S.
and the UK, MFP growth in finance and business services stalled in all the countries
examined here.
To sum up the above analysis, Korea and Japan experienced relatively higher
MFP growth in the ICT-producing sector. However, the problem for the two countries is
that MFP growth in ICT-using sectors, such as distribution services (retail, wholesale
and transportation) and in the rest of the manufacturing sector (i.e., excluding electrical
machinery), declined substantially after 1995. And these ICT-using sectors have larger
shares of the overall economy than the ICT-producing sector.
2.2. The cumulative contribution of sectors to MFP growth in Japan and Korea
Following Farrell, Baily and Remes (2005) and Fukao, Kim and Kwon (2006), we
plot a modified Harberger (1998) diagram and examine the contribution of individual
sectors to macro-level productivity growth. The results for the Japanese economy are
shown in Figures 2-5, 2-6, and 2-7. The vertical axes display the cumulative sector
contributions to aggregate MFP growth; while the horizontal axes depict the cumulative
sector output share in total value added (Domar weights). Sectors are lined up by
descending order of MFP contribution.
Figure 2-5 shows the sectoral MFP growth contribution for the period 1973-2005
for the economy as a whole. The weight of the gross output of sectors with positive
MFP growth is 62%, while the weight of sectors with negative MFP growth is 38%. The
top five sectors in terms of their MFP growth contribution are electrical and optical
equipment, wholesale trade, transport equipment, chemicals and chemical products, and
machinery not elsewhere classified. As can be seen, productivity growth in the economy
as a whole, which is represented by the broken horizontal line, was lower than the sum
of the contributions of the two leading sectors, electrical and optical equipment and
wholesale. Sectors whose contribution to economy-wide MFP growth was negative
include real estate, machinery and equipment rental, and construction.
Figure 2-6 shows the cumulative contribution to MFP growth within the
manufacturing sector. In manufacturing, most industries made a positive contribution to
MFP growth: the weight of the gross output of industries with positive MFP growth is
73%. Only three industries - textiles, leather products and footwear; food, beverages and
tobacco; and coke, refined petroleum and nuclear fuel underwent substantial negative
MFP growth.
9
Next, Figure 2-7 shows the cumulative contribution to MFP growth within the
service sector. In services, the MFP growth contribution of about half of the industries
were negative. The weight of the gross output of industries with negative MFP growth
was about 48%, as a result the MFP growth of the overall service sector in 1973-2005
was relatively small. These results indicate that for Japan’s economy to achieve
sustainable MFP growth, an acceleration of productivity growth in the service sector is
indispensable.
Figure 2-5 Cumulative Contribution of Industries to MFP Growth:
Japan, 1973-2005, Economy-wide
Cumulative contribution to TFP growth (%)
1.6
1.4
POST AND
Chemicals and chemical
TELECOMMUNICATIONS
products
TRANSPORT
AND STORAGE
Retail trade, except of motor
MACHINERY, NEC
vehicles and motorcycles;
repair of household goods
FINANCIAL
INTERMEDIATION
PUBLIC ADMIN AND
DEFENCE; COMPULSORY
SOCIAL SECURITY
TRANSPORT EQUIPMENT
1.2
1
0.8
0.6
HOTELS AND
RESTAURANTS
FOOD , BEVERAGES AND
TOBACCO
CONSTRUCTION
OTHER COMMUNITY, SOCIAL
AND PERSONAL SERVICESCoke, refined petroleum and
nuclear fuel
Renting of m&eq and other
business activities
HEALTH AND SOCIAL WORK
ELECTRICAL AND OPTICAL
EQUIPMENT
Real estate activities
0.4
Wholesale trade and
commission trade, except of
motor vehicles and
motorcycles
0.2
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Cumulative industry output percentile in aggregate value added (Domar weight)
Figure 2-6 Cumulative Contribution of Industries to MFP Growth:
Japan, 1973-2005, Manufacturing
Cumulative contribution to TFP growth (%)
2.5
TEXTILES, TEXTILE ,
LEATHER AND
FOOTWEAR
BASIC METALS AND
MACHINERY, NEC FABRICATED METAL FOOD , BEVERAGES AND
TOBACCO
Chemicals and chemical
products
Coke, refined petroleum and
nuclear fuel
TRANSPORT EQUIPMENT
2
1.5
ELECTRICAL AND
OPTICAL EQUIPMENT
1
0.5
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cumulative industry output percentile in aggregate value added (Domar weight)
10
0.9
1
Figure 2-7 Cumulative Contribution of Industries to MFP Growth:
Japan, 1973-2005, Services
Cumulative contribution to TFP growth (%)
1.2
1
0.8
0.6
ELECTRICITY, GAS AND
Sale, maintenance and repair
WATER SUPPLY
POST AND
of motor vehicles and
motorcycles; retail sale of fuel
Retail trade,TELECOMMUNICATIONS
except of
EDUCATION HOTELS AND
motor vehicles and
motorcycles; repair of
CONSTRUCTION
TRANSPORT AND RESTAURANTS
household goods
STORAGE
OTHER COMMUNITY,
SOCIAL AND PERSONAL
FINANCIAL
SERVICES
INTERMEDIATION
PUBLIC ADMIN AND
DEFENCE;
Renting of m&eq and other
COMPULSORY SOCIAL
business activities
SECURITY
Wholesale trade and
commission trade, except
of motor vehicles and
motorcycles
0.4
HEALTH AND SOCIAL
WORK
0.2
Real estate activities
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Cumulative industry output percentile in aggregate value added (Domar weight)
Figures 2-8, 2-9 and 2-10 show the results for Korea. We begin with the economy
as a whole, where the weight of gross output of industries with positive MFP growth in
1972-2005 is about 66%, while that for industries with negative MFP growth is about
34%. Figure 2-8 shows the industries that made a positive contribution to economywide MFP growth. Leading industries in this group include financial intermediation and
post and telecommunications in the services sector, and chemicals, electronic valves
and tubes, and basic metals in the manufacturing sector. On the other hand, industries
with a negative contribution to economy-wide MFP growth included public
administration and defense, other real-estate activities, hotels and restaurants,
construction, and education.
Figure 2-9 shows the industry contribution to MFP growth in the manufacturing
sector. The weight of the gross output of industries that made a positive MFP growth
contribution in manufacturing is 99%, while the weight of those that made a negative
MFP growth contribution is 1%. Industries making a leading contribution to MFP
growth include the IT industries, i.e., electronic valves and tubes; other electrical
machinery and apparatus; telecommunication equipment; office, accounting and
computing machinery; radio and TV receivers; and a number of non-IT industries
including chemicals, basic metals; machinery; fabricated metal; coke refined petroleum
and nuclear fuel; and pharmaceuticals. On the other hand, industries with negative MFP
growth include aircraft and spacecraft, railroad equipment and transport equipment, and
printing and reproduction.
11
Turning to services, the results are shown in Figure 2-10. The weight of the gross
output of industries with positive MFP growth in services is only about 38%, while the
weight of industries with negative MFP growth is 62%. Service industries that made a
positive contribution to MFP growth include financial intermediation, post and
communication, inland transport, insurance and pensions, and water transport.
Industries with negative MFP growth include public administration and defense, other
real-estate activities, hotels and restaurants, education, legal, technical and advertising
services, research and development, other service activities, and wholesale trade.
Figure 2-8 Cumulative Contribution of Industries to MFP Growth:
Korea, 1972-2005, Economy--wide
2
Wearing apparel
Coke, refined petroleumRetail trade
Wholesale trade
Computer related activities
Food and beverages
Health
and
social work
Rubber
and
Plastics
Wood
Legal,
technical
and
Radio and TV receivers
Fabricated metal
advertising
Office, accounting and
Education
Pharmaceuticals
Machinery
computing machinery
Construction
Electrical supply
Hotels and restaurants
Textiles
Motor vehicles
Telecommunication
Other electrical machinery
Basic metals
Insurance equipment
and pension
Public admin. and defense
Chemicals
Financial
intermediation
Post and
telecommunications
Other real estate activities
Electronic valves and tubes
Cumulative contribution of TFP growth (%)
1.5
1
0.5
0
-0.5
Agriculture
-1
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cumulative industry output percentile in aggregate value added (Domar weight)
12
0.9
1
Figure 2-9 Cumulative Contribution of Industries to MFP Growth:
Korea, 1972-2005, Manufacturing
4.5
Coke, refined petroleum
Tobacco
Other non-metallic mineral
Leather
Wearing apparel
Manufacturing nec
Pulp
and
paper
Building and repairing of
Rubber and plastics
ships
Food
Wood
Fabricated metal
Cumulative contribution to TFP growth (%)
4
3.5
Radio and TV receivers
3
Pharmaceuticals
Office, accounting and
computing machinery
2.5
Machinery, nec
Motor vehicles, trailers
Other electrical machinery
Telecommunication
equipment
Textiles
Basic metals
2
1.5
Chemicals
1
Electronic valves and tubes
0.5
0
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
Cumulative industry output percentile in aggregate value added (Domar weight)
Figure 2-10 Cumulative Contribution of Industries ot MFP Growth:
Korea, 1972-2005, Services
1.5
Renting of machinery and
equip.
Retail trade
Health and social work
Gas supply
Other business activities
Inland transport
Water transport
Wholesale
trade and
Legal, technical
Electricity supply
advertising
Insurance and pension
Education
Financial intermediation
Post and
telecommunications
Cumulative contribution to TFP growth (%)
1
0.5
Construction
Hotels and restaurants
0
-0.5
Other real estate activities
-1
Public admin. and defense
-1.5
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
Cumulative industry output percentile in aggregate value added (Domar weight)
13
0.9
1
3. Has ICT Investment Contributed to Economic Growth in Japan and Korea?
3.1 Accumulation of ICT assets in Japan and Korea
From the JIP and KIP databases, we are able to extract data on ICT assets and
compare the trends in ICT investment between the two countries. Our definition of ICT
assets is consistent with that stipulated by the EU KLEMS project and is comprised of
computer and peripheral equipment, communication equipment and software.
Developments in ICT investment in Japan are shown in Figure 3-1-1. ICT
investment in Japan grew steadily until 1991 and its annual average growth rate was
8.6% in 1970-2005. However, since the early 1990s, growth has been more uneven.
Stagnating in the first half of the 1990s, ICT investment picked up again during the
second half of the decade and has continued to increase. In 2005, ICT investment stood
at 23.5 trillion yen (in constant 2000 prices) and accounted for 18% of total investment.
The biggest component within ICT investment is investment in computers and other
ICT equipment, which in 2005 amounted to 13.5 trillion yen or 58% of total ICT
investment.
Figure 3-1-1 ICT Investment in Japan
billion yen (2000 constant price)
25000
20000
Software
15000
Communication
equipment
Computing equipment
10000
5000
02
00
04
20
20
20
98
19
96
19
92
90
88
94
19
19
19
19
86
19
84
19
80
78
82
19
19
19
76
19
74
19
72
19
19
70
0
Source: JIP 2008 Database
The movement in ICT investment in Korea is shown in Figure 3-1-2. The annual
average growth rate of Korean ICT investment was 6.0% during 1970-2005, which was
lower than the Japanese growth rate of ICT investment. However, in 1995-2005 the
growth rate of Korean ICT investment, at 15.5%, was higher than the 13.1% growth rate
of Japanese ICT investment. Although Korean ICT investment showed steady growth
until 1997, it declined drastically in 1998 due to the Asian currency crisis. However, it
14
recovered rapidly and reached 23 trillion won in 2005. The share of ICT investment in
total investment in Korea was 11.2% in 2005. Unlike Japan, the largest component in
ICT investment in Korea is software, accounting for 51.1% of total ICT investment.
Figure 3-1-2 ICT Investment in Korea
30000
billion won (2000 contant price)
25000
Software
Communication equipment
Computing equipment
20000
15000
10000
5000
02
00
98
96
94
92
90
04
20
20
20
19
19
19
19
86
84
82
80
78
76
74
72
88
19
19
19
19
19
19
19
19
19
19
19
70
0
Source: KIP Database
Next we compare the ICT investment/GDP ratios of major developed economies,
including Japan and Korea (Figure 3-2). We find that the trends in the ICT
investment/GDP ratios in major developed countries since the late 1990s fall into two
groups. In the U.S. and UK, the ratios increased rapidly and reached 13% and 11% in
2005, respectively. On the other hand, in other countries the ratios were only in the 4%
range with the exception of Germany at 6%. While Japan’s ICT investment/GDP ratio
was the lowest among the countries here for much of the 1990s and 2000s, it caught up
with many of the other countries in 2005 due to the economic recovery in Japan. On the
other hand, the trend in Korea closely followed that in the U.S. and the UK before the
Asian currency crisis, but since then Korea's ICT investment/GDP ratio has stagnated
around 4%.
15
Figure 3-2 ICT Investment/GDP Ratio in the Major Developed Countries
14
12
Japan
Korea
10
US
UK
%
8
6
France
Germany
Italy
4
2
0
Source: EU KLEMS Database March 2008, JIP Database 2008, KIP Database
Turning to the growth in ICT capital services of the major developed economies,
the trends are displayed in Figure 3-3. In four countries (the UK, U.S., Korea and
Germany) the growth rates of ICT capital services after 1995 exceeded 10% per annum.
On the other hand, the growth rate of ICT capital service of Japan was the lowest among
the major developed countries due to the long-term stagnation of the economy.
Nevertheless, by 2005 growth in Japan's ICT capital services had almost reached the
same level as in France and Italy.
16
Figure 3-3 Growth in ICT Capital Service in the Major Developed Countries (Market economy)
500.0
450.0
400.0
350.0
Korea
Japan
US
1995=100
France
300.0
Germany
250.0
Italy
UK
200.0
150.0
100.0
50.0
_1
98
_1 0
98
_1 1
98
_1 2
98
_1 3
98
_1 4
98
_1 5
98
_1 6
98
_1 7
98
_1 8
98
_1 9
99
_1 0
99
_1 1
99
_1 2
99
_1 3
99
_1 4
99
_1 5
99
_1 6
99
_1 7
99
_1 8
99
_2 9
00
_2 0
00
_2 1
00
_2 2
00
_2 3
00
4
20
05
0.0
Source: EUKLEMS Database March 2008
3.2 The contribution of ICT capital services to economic growth in Korea and
Japan
Using the growth accounting data from Table 3-1, we compare the contribution of
ICT capital services to economic growth in Korea and Japan. We find that in 1980-2005,
the growth rate of value added in Korea was considerably higher than that in Japan. As
shown in the table, the high growth rate in Korea was largely driven by the rapid
increase in capital services, while the increase in capital services was much slower in
Japan. However, the substantial gap in the contribution of capital services between the
two countries is not the result of a difference in the ICT capital services growth rate, but
the difference in the growth rate of non-ICT capital services.
17
Table 3-1 Growth accounting including ICT capital service (Market economy)(%)
Value added
Labor
Man-hour
Labor quality
Capital
ICT capital
Non-ICT capital
MFP
1980-1995
Korea
Japan
9.54
3.87
2.20
0.38
1.91
0.11
0.29
0.27
5.58
1.98
0.50
0.46
5.00
1.52
1.76
1.52
1995-2000
Korea
Japan
5.01
1.01
0.24
-0.43
-0.20
-0.86
0.44
0.42
5.91
1.07
0.91
0.50
4.94
0.57
-1.14
0.38
2000-2005
Korea
Japan
4.68
0.96
1.12
-0.66
0.62
-1.03
0.50
0.37
4.28
1.06
0.75
0.41
3.54
0.65
-0.73
0.57
Source: EU KLEMS Database March 2008 and KIP Database
Next, we compare the contribution of capital services to economic growth by
industry. As shown in Table 3-2, the contribution of capital services in the market
economy in 1995-2000 and 2000-2005 was highest in Korea, the UK and U.S.
Moreover, whereas the contribution of capital services input growth in the market
economy overall in the latter period declined in most countries, it increased in the UK
and U.S.
Table 3 -2 Con tribu tion s of ICT Capital Se rvic e In pu t Growth to th e Economic Growth (% )
1 99 5- 20 00
Franc e Ge rmany
Kore a
Japan
US
Market e con omy total
0 .9 1
0.50
0.57
0 .5 4
.Elec tric al mac hine ry, post
an d c ommu n ication
1 .4 9
1.50
0.82
.Man u fac turing, e xclu ding
e le ctrical
0 .8 3
0.15
0.24
.Othe r goods produ cin g
indu stries
0 .3 4
0.11
.Distribu tion servic es
0 .4 4
.Financ e an d bu sine ss
se rvice s
2 .0 7
.Pe rsonal an d social
se rvice s
0 .6 4
20 00 - 20 05
Franc e German y
Italy
UK
Korea
Japan
US
Italy
UK
0 .6 8
0.43
0.95
0 .75
0 .4 1
0.8 5
0.5 0
0 .34
0 .1 3
1.2 3
0 .1 6
0 .1 8
0.80
2.46
1 .18
0 .4 7
1.5 9
0.03
0 .25
0 .1 5
3.7 8
0 .3 3
0 .2 0
0.28
0.46
0 .36
0 .2 2
0.6 5
0.19
0 .12
0 .0 6
0.5 9
0.64
0 .2 8
0 .0 9
0.15
0.20
0 .07
0 .0 3
0.6 9
0.37
0 .03
0 .0 6
0.2 2
0.15
0.53
0 .5 4
0 .4 9
0.46
0.81
0 .28
0 .1 0
0.8 3
0 .63
0 .21
0 .0 7
0.9 0
1.61
0.75
1 .0 0
2 .1 3
0.76
1.73
2 .44
1 .5 0
0.8 9
0.79
0 .99
0 .3 4
2.3 3
0.20
0.57
0 .4 8
0 .2 7
0.38
0.49
0 .26
0 .0 7
0.7 4
0.45
0 .10
0 .1 2
0.6 0
Sou rce : EU KLEMS Database March 20 0 8 and KIP Database
Looking at individual industries we find that in the electrical machinery and post
and communication industry the contribution of ICT capital services in Japan, as in
Korea (and the UK), was relatively high in 1995-2000. However, whereas the
contribution of ICT capital services remained high in Korea (and the UK), it
substantially declined in Japan in the 2000-2005 period.
In the service sector, notable results include a low contribution of ICT capital
services in Japan’s distribution industry for the entire decade, and a high contribution of
ICT capital services in Korea’s finance and insurance industry. Another notable pattern
18
is the across-the-board increase in the growth contribution of ICT capital services in the
service industries of the UK and U.S.
Finally, regarding the accumulation of ICT assets we find different patterns for
Korea and Japan. Korean ICT capital accumulation was rapid until the Asian currency
crisis, but then it slowed down in the early 2000s. On the other hand, ICT capital
accumulation in Japan was slow in the 1990s due to a prolonged economic stagnation.
However, in conjunction with the economic recovery from 2002, ICT capital
accumulation in Japan gradually caught up with other countries, as can be seen in
Figure 3-2. The contribution of capital services to economic growth in the Japanese
service sector was relatively low when compared to the other countries examined here.
4. Resource Reallocation Effects in Japan and Korea
4.1 Measurement methodology and results for the market economy as a whole
We commonly observe that factor prices for the same category of labor or rates of
return to capital are different across industries. If such differences are caused by
institutional obstacles to inter-industry factor movements and each factor price is equal
to the marginal product of that production factor, GDP can be raised by shifting
production factors from industries with low factor prices to those with high factor prices.
In this section, we analyze how such resource reallocations have contributed to Japan’s
economic growth.4
Let us analyze this issue in a growth accounting framework. As Jorgenson et al.
(2007) have shown, how the resource reallocation effect is measured in growth
accounting depends on the type of growth accounting method chosen. In the case of
growth accounting in the EU KLEMS project, factor price equalization between
industries is not assumed and macro-level factor inputs are calculated by a Tornqvist
index, in which factor input growth across industries is aggregated by using the factor
income in each industry as aggregation weights. Therefore, if production factors move
from low factor price industries to high factor price industries, this reallocation will be
treated as an increase in macro-level factor inputs. Jorgenson et al. labeled this type of
growth accounting method the “direct aggregation across industries” approach.
However, there is another type of growth accounting method, which Jorgenson et
al. called the “production possibility frontier” approach. In this case, each input is
assumed to receive the same price in all industries. The macro-level quantity of each
4
For more details on the analysis of resource reallocation effects in Japan, see Fukao, Miyagawa
and Takizawa (2007).
19
input is the simple sum of inputs across industries. In this approach, reallocation effects
are included in macro MFP growth.
Jorgenson et al. (2007) showed the following relationship between the macro
MFP growth derived from the production possibility frontier approach, νT, and the
macro MFP growth derived from the direct aggregation across industries approach, νTD.
νT =νT D
⎞
⎛ ⎛ ν
⎞
+ ⎜ ∑ ⎜ w j K , j Δ ln K j ⎟ −ν K Δ ln K ⎟
⎟
⎟
⎜ j ⎜ νV , j
⎠
⎠
⎝ ⎝
where νTD
(1)
⎞
⎛ ⎛ ν
⎞
+ ⎜ ∑ ⎜ w j L , j Δ ln L j ⎟ −ν L Δ ln L ⎟
⎟
⎟
⎜ j ⎜ νV , j
⎠
⎠
⎝ ⎝
is equal to the weighted sum of industry level MFP growth, νj, across
industries:
⎛
⎜
⎝
νT D = ⎜ ∑
j
wj
νV , j
⎞
⎟
⎠
νj⎟
(2)
The upper bars denote the average values across periods t and t+1. Δ represents the
change of a value from period t to period t+1, wj is the proportion of industry j’s value
added in aggregate value added, νK, j and νL, j are the share of capital and labor income,
respectively, in industry j’s gross output, and νV, j stands for industry j’s value-added
gross output ratio. Therefore the coefficient of νj, wj/νK, j, in equation (2) denotes the
ratio of industry j’s gross output to aggregated value added. Equation (2) implies that
the macro MFP growth derived from the direct-aggregation-across-industries approach,
νTD, is equal to the direct aggregation of each industry’s MFP growth with Domar
weights.
In equation (1), Kj denotes the Tornqvist index of capital input in industry j, and
Lj the Tornqvist index of labor input in industry j:
Δ ln K j = ∑ wk , j Δ ln K k , j
k
Δ ln L j = ∑ wl , j Δ ln Ll , j
l
where
wk , j =
PK ,k , j K k , j
∑P
K ,k , j
Kk, j
k
20
wl , j =
PL ,l , j Ll , j
∑P
L ,l , j
Ll , j
l
Kk,j denotes input of type k capital in industry j, and Ll,j input of type l labor in industry j.
Similarly, PK,k,j denotes the price for type k capital in industry j, and PL,l,j the price for
type l labor in industry j.
K and L denote the macro-level capital input index and the macro-level labor
input index, respectively, which are calculated under the assumption of identical factor
prices across industries:
Δ ln K = ∑ wk Δ ln K k
k
Δ ln L = ∑ wl Δ ln Ll
l
where
Kk = ∑ Kk , j
j
Ll = ∑ Ll , j
j
and wk and wl are defined by
wk =
PK , k K k
∑P
K ,k
Kk
k
wl =
PL ,l Ll
∑P
L ,l
Ll
l
PK,k stands for the economy-wide average price for type k capital, and PL,l the
economy-wide average price for type l labor. In equation (1), νK represents the
aggregated capital income value-added ratio and νL the aggregated labor income valueadded ratio.
The second term on the right-hand side of equation (1) denotes the effect of
capital reallocation on macro MFP growth, νT, which is derived from the production
possibility frontier approach. Similarly, the third term on the right-hand side of equation
(1) denotes the effect of labor reallocation on macro MFP growth, νT, which is derived
from the production possibility frontier approach. We can rewrite the second term on
the right-hand side of equation (1) as
21
⎛
∑ ⎜⎜ w
j
⎝
j
⎞
⎛ ν
⎞
ν K, j
Δ ln K j ⎟ − ν K Δ ln K = ∑ ⎜ w j K , j Δ ln K j − wK , jν K Δ ln K ⎟
⎟
⎜ ν
⎟
νV , j
j ⎝
V,j
⎠
⎠
⎛ ν
⎞
⎛
⎞
= ∑ ⎜ w j K , j − wK , jν K ⎟Δ ln K j + ν K ⎜⎜ ∑ wK , j Δ ln K j − Δ ln K ⎟⎟
⎜ ν
⎟
j ⎝
V,j
⎝ j
⎠
⎠
(3)
where wK,j is defined by
∑k PK ,k K k , j
wK , j =
∑∑ PK , k K k , j
j
k
In equation (3), the value of wjνK, j/νV, j is equal to the ratio of capital income in
industry j to the macro-level value added. The value of this coefficient shows the
percentage increase in GDP for a one-percent increase in capital input in industry j. On
the other hand, the value of wK,jνK shows the percentage increase in GDP for a onepercent increase in capital input in industry j when the average price of capital across
different types of capital in industry j is equal to the economy-wide average price of
capital, that is, ΣkPK,k,jKk,j=ΣkPK,kKk,j.
Therefore, the first term on the right-hand side of equation (3) denotes the interindustry reallocation effect of aggregated capital. If the industry-level growth rate of
capital input, Δln Kj, is positive in industries where the industry-level average capital
price is higher than the macro-level average capital price, i.e., ΣkPK,k,jKk,j>ΣkPK,kKk,j, and
if the industry-level growth rate of capital input, Δln Kj, is negative in industries where
the industry-level average capital price is lower than the macro-level average capital
price, i.e., ΣkPK,k,jKk,j<ΣkPK,kKk,j, then there will be a positive inter-industry reallocation
effect of aggregated capital.
In the case of the continuous time version of equation (3), the second term on the
right-hand side of equation (3) can be expressed as
⎛ ∑ PK , k K k , j
⎜
νK ∑⎜ k
j ⎜ ∑∑ PK , k K k , j
⎝ j k
⎛⎛
⎞⎞
⎞
⎜ ⎜ PK , k , j K k , j
PK , k K k , j ⎟ ˆ ⎟ ⎟
∑k ⎜ ⎜ P K − P K ⎟ K k , j ⎟ ⎟⎟
⎜ ⎜ ∑ K ,k , j k , j ∑ K ,k k , j ⎟
⎟
k
⎠
⎝⎝ k
⎠⎠
Therefore, we can interpret the second term on the right-hand side of equation (3) as the
reallocation effect of changes in the capital composition within each industry. Suppose
that the relative price of type k capital to the average value of prices for other types of
capital in industry j is lower than the macro-level average relative price of type k capital,
then an increase of capital input of this type in industry j will improve resource
22
allocation and raise the macro MFP growth rate derived from the production possibility
frontier approach, νT.
A similar interpretation applies to the labor reallocation effect. The third term on
the right-hand side of equation (1) can be decomposed into the inter-industry
reallocation effect of aggregated labor and the reallocation effect of changes in the labor
composition within each industry.
However, as we have already pointed out, it is difficult to measure actual income
for each type of capital in each industry. Because of this difficulty, we mainly focus on
the inter-industry reallocation effect of aggregated capital and aggregated labor in this
paper.
Table 4-1 shows the MFP growth in Japan 5 and Korea 6 derived from the
production possibility frontier approach, νT, the MFP growth derived from the approach
by direct aggregation across industries, νTD, the reallocation effect of capital input, and
the reallocation effect of labor input for each period. It should be noted that the analysis
here only focuses on reallocation effects in the market economy, not the economy as a
whole.
The table shows that the reallocation effect of labor input was negligible in Japan
except in the period 1990-2000. On the other hand, there was a positive and substantial
reallocation effect of capital input for the whole period analyzed. The table also shows
that, during the period 1990-2000, the total reallocation effect of labor and capital input
became greater than the Domar-weighted MFP growth (macro MFP growth derived
from the approach by direct aggregation across industries approach), νTD.
In contrast to the case of Japan, in Korea the reallocation effect of labor input was
greater than the reallocation effect of capital input in all periods. What is more, for the
period 1980-2000, we find relatively large negative values for the reallocation effect of
capital input. On the other hand, the reallocation effect of labor input was positive – and
greater than the Domar-weighted MFP growth – except during the period 1980-90. Thus,
while the reallocation of labor, that is, the shift of labor from low wage industries to
high wage industries, has made a substantial positive contribution to Korea’s aggregate
MFP growth, the contribution of capital reallocation has been negative.
5
The analysis of the Japanese economy is based on the JIP Database 2008. JIP Database 2008 was
compiled in a collaboration between RIETI as part of its "Study on Industry-Level and Firm-Level
Productivity in Japan" research project and Hitotsubashi University as part of its Hi-Stat (21stCentury COE Program, "Research Unit for Statistical Analysis in the Social Sciences") project. For
details on the JIP Database, see Fukao et al. (2007).
6
The analysis of the Korean economy is based on the KIP Database 2007.
23
To sum up the above analysis, it seems that Japan has problems mainly in the
reallocation of labor input, while Korea's problems lie more in the reallocation of capital
input.
Table 4-1 Aggregate Reallocation Effects in Japan and Korea
1975-80
Japan
(1) Growth rate of aggregated MFP, νT
a=b+c+d
2.59
(2) Domar weighted MFP growth, νTD
b
2.19
(3) Reallocation effects of capital input
c
0.47
(4) Reallocation effects of labor input
d
-0.07
*These estimates for Japan are from Fukao, Miyagawa and Takizawa (2007).
1980-90 1990-2000
1.89
0.51
1.64
0.10
0.28
0.18
-0.03
0.23
(Average annual growth rates: %)
2000-05
0.98
0.92
0.07
-0.02
1972-80
Korea
0.06
(1) Growth rate of aggregated MFP, νT
a=b+c+d
-1.85
(2) Domar weighted MFP growth, νTD
b
0.82
(3) Reallocation effects of capital input
c
1.09
(4) Reallocation effects of labor input
d
*These estimates for Korea are based on Korea Industrial Database (2007).
1980-90
2000-05
1990-2000
1991-1997 1999-2005
2.50
0.06
-0.38
0.46
1.96
0.00
-0.68
0.50
0.59
0.21
-0.55
-0.41
-0.13
-0.65
-0.12
1.09
0.46
0.43
0.61
0.50
4.2 Industry-level Reallocation Effect of Capital and Labor in Japan
While the results shown in Table 4-1 are instructive, they show us neither in what
sectors factor prices are high, nor how production factors have moved between
industries. In order to intuitively understand the process of capital and labor input
reallocation, we examine reallocation effects across industries. The results are shown in
Figures 4-1-1 and 4-1-2.
We begin with the figure for capital input (Figure 4-1-1), which shows the
aggregate reallocation effect, (wjνK,j/νV,j − wK,jνK)Δln Kj, as well as its two components,
wjνK,j/νV,j − wK,jνK and Δln Kj, in the two countries for the periods 1975-1990, 1990-2000,
and 2000-2005. Values are on an annual basis. As explained above (Section 4.1),
wjνK,j/νV,j − wK,jνK is positive in industries where the industry-level average capital price
is higher than the macro-level average capital price. We also prepare a similar figure to
show the process of labor input reallocation across sectors.
Because the number of industries used for the derivation of Table 4-1 is too great
in the case of Japan and in the case of Korea to obtain instructive graphs, the figures
here show resource reallocation effects based on more aggregated industry
classifications. Specifically, the whole market economy of Korea or Japan is
decomposed into seven sectors: IT-using manufacturing, IT-using non-manufacturing,
IT-producing manufacturing, IT-producing non-manufacturing, non-IT intensive
manufacturing, non-IT intensive non-manufacturing, and other industries. We then
24
examine resource reallocation across these sectors, definitions of which are provided in
Appendix Table 1.
Figure 4-1-1 shows the industry level reallocation effect of aggregated capital
input, (wjνK,j/νV,j - wK,jνK)Δln Kj, and the two components of this value, wjνK,j/νV,j - wK,jνK
and Δln Kj, for Japan for the periods 1975-1990, 1990-2000 and 2000-2005. In almost
all industries, capital inputs increased in the three periods. Therefore, industries with
high capital prices, such as the IT-using non-manufacturing sector (finance, insurance,
gas and water supply, wholesale, retail, etc.) contributed to the improvement of capital
allocation. On the other hand, industries with low capital prices, such as the non-IT
intensive non-manufacturing sector (real estate, transportation, eating and drinking
places, etc.), were responsible for negative reallocation effects. In Japan, capital inputs
increased rapidly in the IT-producing manufacturing sector while in what was probably
a reflection of Japanese electronics firms losing their competitiveness in the 2000s,
capital prices in this industry declined substantially. This change created the negative
reallocation effect of capital inputs after 2000.
Figure 4-1-1 Industry-Level Reallocation Effect of Capital Input in Japan: 1975-2005
12.000%
10.000%
8.000%
6.000%
4.000%
2.000%
0.000%
-2.000%
0.600
Δ ln K j
0.450
0.300
0.150
-0.150
0.000
-0.300
-0.450
⎛ wj ν K,j 1
⎞
⎜
− 1⎟
⎜ν
⎟
⎝ V , j ν K w Kj
⎠
0.300%
0.200%
0.100%
-0.100%
0.000%
-0.200%
-0.300%
⎞
⎛ wj ν K, j 1
wK , jν K ⎜
− 1⎟Δ ln K j
⎟
⎜ν
⎠
⎝ V , j ν K wK , j
IT-using manufacturing sector
IT-using non-manufacturing sector
IT-producing manufacturing sector
IT-producing non-manufacturing
sector
Non-IT intensive manufacturing
sector
Non-IT intensive non-manufacturing
sector
1975-1990
1990-2000
Other Industries
2000－2005
Figure 4-1-2 shows the industry level reallocation effect of aggregated labor input,
(wjνL,j/νV,j – wL,jνL)Δln Lj, and the two components of this value, wjνL,j/νV,j – wL,jνL and
Δln Lj, in Japan for the periods 1975-1990, 1990-2000 and 2000-2005. Labor prices are
highest in the IT producing non-manufacturing sector (telephone and information
25
services, broadcasting, etc.). The labor input increase in this sector after 2000 created
positive reallocation effects. The second-highest labor prices can be found in the ITproducing manufacturing sector. However, the rapid decrease of labor inputs in this
sector resulted in negative labor reallocation effects in the 2000s. In other industries (the
primary sector, construction and civil engineering), in which labor prices are low, the
decline of labor input created a large positive reallocation effect.
Figure 4-1-2 Industry-Level Reallocation Effect of Labor Input in Japan: 1975-2005
4.00%
3.00%
2.00%
1.00%
-1.00%
0.00%
-2.00%
-3.00%
-4.00%
0.700
-5.00%
0.600
Δ ln L j
0.500
0.400
0.300
0.200
0.100
-0.100
0.000
-0.200
⎛ w j ν L, j 1
⎞
⎜
−1⎟
⎜ν
⎟
⎝ V , j ν L wLj ⎠
0.040%
0.030%
0.020%
0.010%
0.000%
-0.010%
-0.020%
⎛ w j ν L, j 1
⎞
− 1⎟Δ ln L j
wL , jν L ⎜
⎜ν
⎟
⎝ V , j ν L wL , j
⎠
IT-using manufacturing sector
IT-using non-manufacturing sector
IT-producing manufacturing sector
IT-producing non-manufacturing
sector
Non-IT intensive manufacturing
sector
Non-IT intensive non-manufacturing
sector
1975-1990
1990-2000
2000－2005
Other Industries
4.2 Industry-level Reallocation Effect of Capital and Labor in Korea
Figure 4-2-1 shows the industry level reallocation effect of aggregated capital
inputs in Korea for each period. As in Japan, capital inputs increased in the three
periods in each of the industries. Therefore, industries with high capital prices, such as
other industries, contributed to the improvement of capital allocation. In contrast to
Japan, where capital prices are highest in the IT-using non-manufacturing sector, capital
prices in Korea are highest in other industries (the primary sector, construction and civil
engineering), and these industries created significant positive reallocation effects. On
the other hand, as in Japan, capital prices in the non-IT intensive non-manufacturing
sector (real estate, transportation, eating and drinking places, etc.) were low and this
sector was responsible for large negative reallocation effects.
26
Figure 4-2-2 shows the industry level reallocation effect of aggregated labor
inputs in Korea for each period.
As in Japan, other industries (the primary sector, construction and civil
engineering) have the lowest labor prices. In Korea, labor inputs in this sector declined
steadily over the last three decades at an annual rate of about two percent. This
continuous movement of workers from the low labor price sector to other sectors
created large positive reallocation effects in labor inputs in Korea.
Until 1990, jobs were mainly created in the manufacturing sectors. After that,
however, the two sectors that absorbed the most workers were IT-producing nonmanufacturing and non-IT intensive non-manufacturing (real estate, transportation,
eating and drinking places, etc.). The IT-producing non-manufacturing sector has high
labor prices and contributed to positive reallocation effects in labor input. On the other
hand, the non-IT intensive non-manufacturing sector has low labor prices and was
responsible for negative labor reallocation effects.
27
5. Conclusion
Using the recently released EU KLEMS Database (March 2007) and other
statistics, we conducted a growth accounting analysis of Korea and Japan. We also
compared the movement in ICT investment in Japan with that in Korea based on the
data of Pyo, Jung and Cho (2007). In addition, we compared the impact of ICT capital
services on economic growth in Japan, the U.S. and major EU countries. Using the KIP
Database 2007 and the JIP Database 2006, we also examined the reallocation of
resources in Korea and Japan. We studied this issue in a growth accounting framework
based on Jorgenson et al. (2007).
The major results obtained through our analysis are as follows:
1.
We have found that the slowdown of MFP was a main factor behind Japan’s
Lost Decade. We have also found that Korea’s catch-up process with industrial nations
in its late industrialization has been predominantly input-led and manufacturing-based
as documented in Timmer (1999) and Pyo (2001).
2.
We observe that the estimated MFP growth rates in manufacturing are much
greater than in services in general, both in Korea and Japan.
3.
Both economies experienced a slowdown in economic growth in the 90s.
However, growth accounting in both economies tell different stories. The Japanese
economy experienced similar problems as the major EU economies with regard to the
slowdown of MFP growth. On the other hand, the slowdown in capital accumulation
28
was a major factor of the slowing economic growth in Korea after the currency crisis in
1997.
4.
The sources of growth in the two economies seem to have switched from inputled growth to MFP-growth by the introduction of ICT-intensive production and service
industries. Both economies have strong ICT-producing sectors but relatively weaker
ICT-using effects.
5.
As for ICT capital accumulation, Japan and Korea showed similar patterns. We
were not able to find clear differences in the trends of the ICT investment/GDP ratios of
the two countries. However, the speed of ICT accumulation in the ICT sector in Korea
is faster than that in Japan. The composition of ICT assets in Japan is different from that
in Korea. In Japan, investment in computer equipment accounted for the largest share of
ICT investment, while in Korea investment in communication equipment accounted for
the largest share.
6.
The MFP growth rate in the ICT sector in both the Japanese and Korean
economies is higher than it is in other sectors. In particular, the MFP growth rate in the
Korean ICT-producing service sector is extraordinary high. Comparing Japanese ICT
capital accumulation with the U.S. and major EU countries, we find that Japanese ICT
capital accumulation is slower than other countries except Italy after 1995.
7.
The reallocation effect of capital input was negligible or negative for most
periods, both in Korea and Japan. On the other hand, the reallocation effect of labor
input was positive for most periods, both in Korea and Japan, and it became greater than
the Domar-weighted MFP growth in recent years in both Japan and Korea.
29
References
Berndt, E. and L. Christensen, “The Translog Function and the Substitution of
Equipment, Structures, and Labor in US Manufacturing, 1929-1968,” Journal of
Econometrics, Vol.1, pp.81-114, 1973.
Berndt, E. and L. Christensen, “Testing for the Existence of a Consistent Aggregate
Index of Labor Input,” American Economic Review, Vol.3, pp.391-404, 1974
Berndt, E. and D. Wood, “Technology, Prices, and the Derived Demand for Energy,”
Review of Economics and Statistics, Vol.57, pp.259-268, 1975.
Denny, M. and M. Fuss, “The Use of Approximation Analysis to Test for Separability
and the Existence of Consistent Aggregates,” American Economic Review, Vol.67,
pp.404-418, 1977.
Farrell, D., M. Baily and J. Remes, “US Productivity after the Dot Com Bust,”
McKinsey Global Institute, 2005.
Fukao, K., Y.G. Kim and H.U. Kwon, “Plant Turnover and MFP Dynamics in Japanese
Manufacturing,” Hi-Stat Discussion Paper Series #180, Hitotsubashi University,
2006.
Fukao, K., S. Hamagata, T. Inui, K. Ito, H.U. Kwon, T. Makino, T. Miyagawa, Y.
Nakanishi and J. Tokui, “Estimation Procedures and MFP Analysis of the JIP
Analysis of the JIP Database 2006 Provisional Version,” RIETI Discussion Paper
Series #07-E-003, 2007.
Fukao, K., T. Miyagawa and M. Takizawa, “Productivity Growth and Resource
Reallocation in Japan,” Hi-Stat Discussion Paper Series #224, Institute of
Economic Research, Hitotsubashi University, 2007.
Ha, B.C. and Pyo, H.K., “The Measurement of IT Contribution by Decomposed
Dynamic Input-Output Tables in Korea (1980-2002),”, Seoul Journal of Economics,
Seoul National University Press , Vol.17 No. 4, 2004
Harberger, A.C., “A Vision of the Growth Process,” American Economic Review,
Vol.88, pp.1-32, 1998.
Jorgenson, D.W., F.M. Gollop and B.M. Fraumeni, Productivity and US Economic
Growth, Harvard University Press, Cambridge, MA, 1987.
Krugman, P., “The Myth of Asia’s Miracle,” Foreign Affairs, November/December,
1994.
Lau, L.J. and J.I. Kim, “The Sources of Growth of the East Asian Newly Industrialized
Countries,” Journal of the Japanese and International Economies, Vol.8, 1994.
Pyo, H.K., “Economic Growth in Korea (1911-1999): A Long-term Trend and
30
Perspective,” Seoul Journal of Economics, Vol.14 No. 1, Seoul National University
Press, 2001
Pyo, H.K., “Interdependency in East Asia and the Post-Crisis Macroeconomic
Adjustment in Korea,” Seoul Journal of Economics, Vol.17, 2004.
Pyo, H.K., S.Y. Jung and J.S. Cho, “Estimates of Gross Fixed Capital Formation, Net
Capital Stock and Capital Intensity in Korea: 11 Assets by 72 Sectors (19702005),” Journal of Korean Economic Analysis, Vol.13 No.1, December 2007.
Pyo, H.K. and B.C. Ha, “A Test of Separability and Random Effects in Production
Function with Decomposed IT Capital”, Hitotsubashi Journal of Economics, 2007.
Timmer, M., “The Dynamics of Asian Manufacturing: A Comparative Perspective,
1963-1993,” Eindhoven Centre for Innovation Studies, Dissertation Series, 1999.
Young, A., “Lessons from the East Asian NICs: A Contrarian View,” European
Economic Review, Vol.38, pp.964-973, 1994.
Yuhn, K.H., “Functional Separability and the Existence of Consistent Aggregates in US
Manufacturing,” International Economic Review, Vol.32, pp.229-250, 1991.
31