Economic Growth after Successful Structural Reforms? - The Implications of Measurement-adjusted TFP Change -

ABSTRACT

Currently, economic and social structural reform is being promoted in Japan. However, there are many problems in the methods of measuring the Total Factor Productivity (TFP) change rate, which is crucial in investigating economic growth and growing industries after successful structural reform. These problems include: (1) a linear homogenous production function and the assumption of a perfect competitive market; (2) use of private enterprises' gross capital stock; (3) the exclusion of land in capital stock in standard measurements; (4) no adjustments made for capital utilization rate between all industries and non-manufacturing industries; (5) no adjustments made for excess or deficient labor input.

This report measures the TFP change rate for all industries, adjusted for the above problems. The specification of the production function is only : (1) functional relationship between products (value added) and capital/labor/production efficiency; (2) proportional relationship between capital input and intermediate input; (3) continuity of the function. A perfect competitive market is not assumed, and unit capital cost is measured under these conditions. Tangible depreciable fixed asset series and land stock series are calculated using the benchmark year method, and these series are combined to produce net capital stock. The capital utilization rate for all industries and for non-manufacturing industries is estimated via an improved version of the method provided by Fukao and Murakami (2001). For labor input, a quantitative series for excess or deficient labor force is calculated by the Carlson-Parkin method using the Bank of Japan's Short-Term Economic Survey of All Enterprises data. Labor input is then adjusted to eliminate excess or deficient labor force estimated by using the imbalanced labor market model.

The non-adjusted TFP change rate for all industries was lower than the adjusted rate by 1.5% and 2.3% on an average annual basis for the period from FY 1992 to FY 1995 and from FY 1996 to FY 1998, respectively. This suggests that if excess capital and labor force are eliminated due to rapid structural reform, and the occurrence of excess or deficient capital and labor force is avoided by improving the liquidity of both inputs, a higher economic growth rate can be achieved. The average annual non-adjusted TFP change rate for the period from FY 1996 to FY 1998 is positive only for the manufacturing, transportation and telecommunications industries. After adjustments, the TFP rate will also be positive for wholesale/retail and the electrical/gas/water supply industries. These five industries are likely to grow if excess capital and labor force are eliminated and their liquidity improved. For those industries whose TFP change rates are negative even after adjustments, it seems necessary to resolve those industries' unique structural problems. To realize an increase in economic growth rates through improved productivity as a result of eliminating excess input, it is crucial that regulations and systems are reformed in order to eliminate vested interests and create new markets.

(This paper was rearranged from Kimura (2002). The method of measuring unit capital cost and many other expansions of numerical formulae were omitted. For details, please refer to Kimura (2002).