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 (1980-1990)
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%
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
• Fertility rates have converged over the past
few decades
– Similar to most developed countries
• The biggest difference to the two countries is
not domestic births, but their views towards
immigration
Immigration
Immigration
• There is a much larger number of Korean
expatriates than Japanese expatriates in the
world
– Larger number of people that would be more
willing to move to Korea, than people more willing
to move to Japan
• Korea also has a large untapped “potential”
labour force in North Korea”
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
Market
• Japan: “domestic market first”-market their
product in the domestic market (economic
growth depend on large and sustained
domestic demand.)
• Korea: “export first” -market their product in
overseas market than in domestic
market.(Accumulated capital by foreign loan
and financial aids.)
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
• Market-Japan “domestic market first”-Korea
“export first”