Monday, October 17, 2011

Why Demographics Matter: Japan’s Lost Decade Was An Illusion

Via Lars Christensen, Daniel Gros points out Japan’s performance over the past two decades hasn’t been as bad as it looks (excerpt):

The Japan Myth

…How should one compare growth records among a group of similar, developed countries? The best measure is not overall GDP growth, but the growth of income per head of the working-age population (not per capita). This last element is important because only the working-age population represents an economy’s productive potential. If two countries achieve the same growth in average WAP income, one should conclude that both have been equally efficient in using their potential, even if their overall GDP growth rates differ.

When one looks at GDP/WAP (defined as population aged 20-60), one gets a surprising result: Japan has actually done better than the US or most European countries over the last decade. The reason is simple: Japan’s overall growth rates have been quite low, but growth was achieved despite a rapidly shrinking working-age population.

The difference between Japan and the US is instructive here: in terms of overall GDP growth, it was about one percentage point, but larger in terms of the annual WAP growth rates – more than 1.5 percentage points, given that the US working-age population grew by 0.8%, whereas Japan’s has been shrinking at about the same rate.

Another indication that Japan has fully used its potential is that the unemployment rate has been constant over the last decade. By contrast, the US unemployment rate has almost doubled, now approaching 10%. One might thus conclude that the US should take Japan as an example not of stagnation, but of how to squeeze maximum growth from limited potential…

...Two lessons emerge from this consideration of the influence of demographic factors on economic growth. First, the idea of a Japanese-style “lost decade” is misleading – even when applied to Japan. Slow growth in Japan over the last decade was due not to insufficiently aggressive macroeconomic policies, but to an unfavorable demographic trend.

Second, a further slowdown in rich countries’ growth rates appears inevitable, given that even in the more dynamic countries the growth rates of the working-age population is declining. In the less dynamic ones, like Japan, Germany, and Italy, near-stagnation seems inevitable.

I’ve gone on the record as saying that I think that achieving high income status for Malaysia is practically inevitable – and Malaysia’s demographics is one of the main factors underlying my view. Based on the latest projections from the US Census Bureau, here’s what Malaysia’s working age to total population ratio will look like:


Based on the above, the maximum impact on growth (about 1%-2% per annum based on IMF research) will be reached in 2023. Even this might be underestimating demographic potential – last year’s projections showed the peak being reached in 2015, so there’s a good chance as the actual numbers come in that we’ll see Malaysia’s growth spurt continuing well into the 2020s.

The flip side of course is that this demographic evolution will make the overall GDP/GNI numbers look good (even on a per capita basis), without necessarily saying anything about actual output or income per worker. Singapore’s discovered that fallacy this past decade – growing headline numbers by importing labour (even highly-paid, skilled labour) hasn’t done much to increase individual household welfare.

High income status is no panacea.


  1. Was it because Japan used more robots and their households could afford higher savings by living on the power of less?

    Secondly, Singapore's home ownership rate is 87 percent. How did they do it?

    Thirdly, carrying forward from your previous post on Morgan Stanley, what's your take on PPSMI ( After fifty four years and billions, it is still a delivery problem of relevants. Are courses taught in english in our local public uni's?

    Fourthly, on the labour xchange figures, it's about quality, not quantity. Without quality, value-added investments will not be assayed.

    i surrender today, hishamh.

  2. Walla,

    On point one - I wouldn't want to speculate. It may very well be as you suspect, or it could be cultural factors. I'll need to research the question (too much knowledge to gain, not enough time!!).

    2. I think it's because from the outset, Singaore was an urban centre which means they've had to deal with that problem from the start. We've had the luxury of more land, which meant that our urban centres could expand outward when necessary. But at this stage, the costs of urbanisation and sprawl are beginning to offset the advantages of urban agglomeration - housing, congestion and transport are all symptoms of this. Hence, our planners are only just beginning to grasp the problem, whereas Singapore has had to confront it from the start. A second problem we have is that Singapore, when it needs to, can restrict immigration. That's not an option for our urban centres, which attract immigration from our hinterland.

    3. PPSMI - I think we risk losing sight of the real problem. I think it's less about English than it is about really poor communication skills. The anecdotal evidence that I've heard (and my own personal experience) suggests it's not just an inability to communicate in English, it's an inability to communicate...period. It shows up worse in English because English is in more demand. PPSMI may help improve the ability to converse in English, but it won't do anything to improve the ability to express thoughts, concepts, etc. etc.

    4. We need both...therein lies the rub.

  3. All good points, hishamh.

    I'll just leave you with number 4.

    Where in the evolution of all our national education policies has there been focus on knowledge and relevance to the world?


  4. But sir,50 percent of jobs in japan are part can it be japanese workers have high income per head...the working class in japan are literallly dying....the job market there is hopeless...japan is not an example..but true enuff...there many insanely rich people in japan like the ones we see in their animes...

  5. Key point - high income economics are also high cost economies. It's called the Penn Effect. Just because you have high income doesn't mean you have high purchasing power.

    We'll be dealing with that here in Malaysia soon enough.