Lost Decades in Growth Performance

The term “lost decade” probably comes from the title of one of the short stories of the famous “lost generation” novelist, F. Scott Fitzgerald, written in 1939. The story is about a man who lost most of his memories from the last decade, but did not know why. In the end we find out that he had been drunk for ten years. The term became popular as a description of the Japanese experience from the late 1980s to the 1990s, when growth stagnated at low levels.¹ Recently, the term has also been applied to other economies, including the United States.²

Economic growth rates have fallen in a substantial number of countries in the last five years, compared to the previous five years. This was partly triggered by the financial crisis, but also occurred in countries that had not directly experienced a financial crisis, such as in Asia. There is now an increasing fear that we might enter a phase of very low global growth. In 2008 I warned of the threat of nominal GDP contraction and deflation as a result of the banking crisis, if the right policies were not adopted. A debate has since arisen about the scenario of “zero growth”. Japan has already experienced two decades of low growth and is possibly entering the beginning of a third decade. What are the lessons for the world? I will first briefly discuss the demand management policies that have been adopted in Japan from the beginning of the slowdown in the early 1990s. Their failure has been a puzzle for conventional demand-side economics. As a result, policy-makers turned to supply-side policies, but these equally failed, increasing the puzzle. To solve it, we will revisit the demand-side argument, specifically the connection between the financial part of the economy and the real economy. And I will use a tool developed in the early 1990s, called the Quantity Theory of Credit (Werner, 1992, 1997, 2005, 2013). This theory has stood the test of time well, and unlike others has not been contradicted by the empirical record. Instead, it has a superior forecasting track record, and a growing body of work supports it (see the survey in Werner, 2012).

This chapter examines the role of structural change in productivity growth in Japan, focusing on her recent lost decades, with reference to the United States. As a matter of fact, Japan and the US have shown quite contrasting performances in terms of aggregate productivity growth before and after the early 1990s (Figure 3.1). Jorgenson and Nomura (2007) state as follows: Before 1990: “The rapid closing of 3.7 per cent per year in the US-Japan gap in GDP per capita during 1960–1990 was achieved by 2.1 per cent annual growth in relative input per capita and 1.6 per cent annual reduction in the TFP[total factor productivity] gap.” But after 1990, “Japanese total factor productivity, relative to the US, fell from 86.1 in 1990, to 81.7 in 2000, and 79.5 in 2004, reflecting the sharp acceleration in US TFP growth after 1995 and the more modest recovery of Japanese TFP growth.”

The financial crash of 2007–2008 brought about the biggest economic recession since 1929. Can we expect a lost decade in terms of output and employment? Or, even worse, several lost decades like in Japan, where a similar crisis erupted in 1991 and has not yet been overcome? From the post-Keynesian and Schumpeterian standpoint on which this chapter relies, the answer is yes.

South Korea (hereafter simply Korea) has performed exceptionally well over the last few decades in catching up with leading OECD economies.¹ Such success has few parallels around the world. Yet, at the same time, Korea is entering a new and critical phase in its development and there are few guarantees of continuing success. Faced with a number of overarching challenges, Korea carries the burden of several long-standing, structural difficulties that are amplifying fast, including a low fertility rate, an aging population, a low economic growth rate, and a socio-economic divide.

Taiwan’s economic performance deteriorated decisively after the late 1990s as the growth rate of GDP and per capita GDP fell. So did the growth of wages in manufacturing and services. Unemployment rose gradually but steadily.

This concluding chapter wraps up the discussion of the lost decade phenomenon in two ways. One is by introducing the concept of paradigmatic shifts in economic policies, which could be long-term institutional changes or short-term demand management, to the regression analysis of the lost decade in growth performance. The other goes one step further by bringing analyses from cross-country econometrics to the dynamic evolution of the entire political and economic process and applying such a framework to the cases of Taiwan and South Korea.