Declining Rate of Return on Capital and the Role of Intangibles in Japan and Korea May 23 rd , 2016 The Fourth World KLEMS Conference Asia KLEMS session @ BBVA Foundation in Madrid Hyunbae Chun (Sogang University) Tsutomu Miyagawa (Gakushuin University) Hak Kil Pyo (Seoul National University) Miho Takizawa (Toyo University) Konomi Tonogi (Rissho University) 1
Outline Japan 1. Weak capital formation and slow economic growth 2. Related literatures 3. Low rate of return on capital 4. Estimating the Factor Price Frontier 5. Summary Korea 1. Falling rate of return on capital 2. Estimating the Factor Price Frontier 3. Summary 2
1. Weak capital formation leads to slow economic growth in Japan • Despite of Abenomics, the Annual growth rate of capital formation Japanese economic growth is still low. % 5.00 4.45 • A major factor of low 4.50 economic growth during 4.00 Abenomics is low growth 3.50 rate in capital formation. 2.75 3.00 • Comparing growth in 2.50 capital formation in 2.00 1.44 Abenomics with the past 1.50 two recovery periods, 1.00 growth rate in capital 0.50 formation in Abenomics is 0.00 the lowest. 2002/1-3-2004/10-12 2009/1-3-2011/10-12 2012/10-12-2015/7-9 （ Source ） System of National Accounts 3
1. Weak capital formation leads to slow economic growth in Japan (contd.) • Slow capital formation leads to low economic growth in Japan. • Although many Japanese people think that low population growth is responsible for the low economic growth in Japan, the contributions of labor input to economic growth in the US and major East Asian countries are also low. • The higher contributions of capital input to economic growth in those countries lead to the gap in economic growth in the 2000s among Japan and the US and the major East Asian countries. Growth Accounting in the US Growth Accounting in Korea Growth Accounitng in Japan 4.0% 10.0% 9.1% 5.0% 4.4% 3.3% 3.5% 4.5% 3.1% 3.1% TFP growth 8.0% 1.1% TFP growth 1.5% 4.0% 3.0% 0.9% 6.1% 3.5% Capital input 2.5% Capital input 6.0% 3.0% 1.6% 4.4% TFP growth 4.2% 2.0% 1.2% 1.3% 1.9% Labor input 1.5% Labor input 2.5% 4.0% Capital input 3.9% 1.5% 2.1% 0.6% 2.0% Labor input GDPgrowth GDPgrowth 1.5% 1.0% 2.0% 0.9% GDPgrowth 1.0% 1.0% 2.1% 0.9% 0.7% 1.0% 1.6% 0.5% -0.1% 1.0% 1.1% 0.0% 0.5% 0.6% 0.5% 0.0% -0.3% -0.1% 1990 － 2000 1980-90 2000-2010 0.0% 0.0% 0.0% 0.3% 1990 － 2000 1980-90 2000-2010 -0.5% -2.0% 1990 － 2000 1980-90 2000-2010 -0.5% （ Source ） APO Productivity Databook 4 （ Surce ） APO Productivity Databook （ Source ） JIP Database
2. . Related lit literatures • Summers (2 (2013, 2015) The decline in capital formation and real interest rate have led to the slow growth rate in advanced countries. • Ando, , Christeris, and Miy iyagawa (2 (2002), Hayashi (2 (2006), , and Fu Fukao (2 (2012) The inefficiency of capital which led to the low real interest rate and profit rate. • Miy iyagawa (2 (2004, 2005) High labor share in the 1990s decreased corporate profit rate. • Murase and An Ando (2014) Under zero bound interest rate, firms prefer liquidity to fixed capital due to the weak governance. • Benigno and Fornaro (2015) A stagnation trap where large output gap and low potential growth rate coexist under pessimistic expectation. 5
3. Why has the rate of return on capital declined? • Although Abenomics tried to stimulate capital formation by expanding monetary policy, its policy has not been successful. • Ando, Christelis, and Miyagawa (2003), Miyagawa (2004, 2005) and Fukao (2012) pointed out that a major factor of low capital formation is caused by the low rate of return on capital. • Rate of return on capital in Japan has declined since the collapse of the bubble economy. Gross rate of return on capital in Japan 23 21 19 17 15 % 13 11 9 7 5 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 6 average rate of return on capital mariginal rate of return on capital
3. Why has the rate of return on capital declined? (c (contd.) • In particular, rate of return in the service sector and non-IT industries are very low. ％ Average rate of return on capital in Japan 35 30 Service sector 25 20 15 10 5 Source: JIP Database 0 Non-IT 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 industries Market economy Manufacturing Service IT industries Non-IT Industries 7
3. Why has the rate of return on capital declined? (contd.) • Fukao (2012) emphasized that increasing capital/value added ratio (K/Y) induced low rate of return on capital. Capital/Value-added (K/Y) ratio in Japan 6 K/Y in the non-IT 5 industries is very high 4 3 2 1 Source: JIP Database 0 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Market economy Manufacturing Service IT industries Non-IT Industries 8
Average rate of return on capital by industry in Japan (2012) Financial intermediation Health and social work Wholesale and retail trade Restaurants and hotels Food, beverages and tobacco Information and communication Wood, paper, and printing Construction Culture and entertainment services Petroleum, coal and chemicals Transport equipment Education Machinery equipment Non-metallic mineral products except petroleum and coal Other service activities Metal, Fabricated metal products Mining and quarrying Precision instruments Real estate and renting Agriculture, forestry and fishing Electricity, gas and water supply Transport and storage Electrical and electronic equipment Furniture and other manufacturing industries Textiles and leather Business services 9 % -10 0 10 20 30 40 50 60 70 80 90
4. Factor Price Frontier Estimation • Low rate of return on capital? w Factor Price Frontier (wage rate ) ⇒ Estimate factor price frontier Productivity (w high ⇔ r low) growth • Furthermore, productivity shifts the frontier? • We assume that the technological factor is positively correlated with intangibles such as IT, R&D and other intangibles . r (rate of return 10 on capital )
4. Factor Price Frontier Estimation (contd.) • Data • JIP 2015 database from 1985 to 2012 • The equation accounting for factor price frontier IT RD HR jt jt jt ln . ln ln( ) ln( ) ln( ) r const a w a a a 1 2 3 4 jt jt j t jt IT RD HR K K K • Dependent variables jt jt jt • r marginal (marginal rate of return on capital) = Capital share × (Value added / Net capital stock) • r average (average rate of return on capital) = (Operating surplus +Consumption of fixed capital) / Net capital stock • Independent variables • w(wage rate) = Labor share × value added / Man-hours • IT, RD & HR = IT investments, R&D investments & Investments in Human Resources • K IT , K RD and K HR = IT capital stock, R&D capital stock and Assets in HR 11
Results: Market economy using average (r) • Higher real wage ( w ) is Market economy Dependent variable: Average rate of return on capital associated with lower rate of (1) (2) return on capital ( r ) Coef. Std. Err Coef. Std. Err ln w -0.131 0.053 ** -1.211 0.060 *** ln IT/K IT 0.168 0.103 0.239 0.087 *** • Larger investments in IT and ln RD/K RD -0.141 0.051 *** -0.136 0.043 *** Human Resources ( HR ) lead to ln HR/K HR 0.438 0.116 *** 0.295 0.098 *** ln Y 1.320 0.050 *** higher ( r ) Constant 2.742 0.206 *** -14.917 0.689 *** Fixed-effects model Fixed-effects model Number of obs 1,773 1,762 Number of groups 70 70 Prob > F 0 0 • Not stable results for the R-sq: within 0.3095 0.5171 impacts of R&D investments between 0.1964 0.0001 on (r) overall 0.0747 0.0235 12
Results: Market economy using marginal (r) Market economy Dependent variable: Marginal rate of return on capital (1) (2) Coef. Std. Err Coef. Std. Err Almost the same ln w 0.491 0.052 *** -0.664 0.058 *** ln IT/K IT 0.071 0.103 0.147 0.083 * results as the case ln RD/K RD -0.181 0.051 *** -0.176 0.041 *** using average (r) ln HR/K HR 0.361 0.116 *** 0.205 0.094 ** ln Y 1.412 0.048 *** Constant 1.651 0.206 *** -17.246 0.663 *** Fixed-effects model Fixed-effects model Number of obs 1,773 1,762 Number of groups 70 70 Prob > F 0 0 R-sq: within 0.3174 0.5534 between 0.2334 0.0077 overall 0.2323 0.0525 13
Recommend
More recommend
