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Does the Sun Have to Set?
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20651 |
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Section : |
MODERN THOUGHT
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| Issue
Date : |
10 / 1992 |
1,774 Words |
| Author
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William V. Rapp
William V. Rapp is a professor at the School of Business of
the University of Victoria, British Columbia. |
In his paper "The Land of The Setting Sun," Professor Laffer accurately describes Japan's amazing postwar economic growth to be based on an extremely high domestic savings rate that permitted Japan to self-finance rapid but noninflationary growth with corresponding rapid asset accumulation. He also correctly surmises that this high savings was the result of intentional government policy.
Indeed, after the war the government established several tax-free savings mechanisms for individuals and excluded capital gains on stock transactions from tax while at the same time discouraging debt availability for consumer finance or home mortgages. In this manner, individuals were encouraged to save for major purchases, emergencies, and old age.
At the same time, the banks, postal savings system, and insurance companies that gathered these funds were pushed to lend them to manufacturing firms for plant and equipment investment. The objective was to fund rapid noninflationary growth without outside capital infusions in order to build a competitive Japanese manufacturing sector. How else was a country with no raw materials going to feed 120 million people? Japan had to have a competitive industrial sector to export to pay for the food and raw materials it needed to import. If savings were not high, investment rates would be inflationary and thus uncompetitive.
Japanese Economic Nationalism
Laffer is correct that a self-financing policy was being pursued for nationalistic reasons and to avoid future outflows of dividends and interest. During the 1950s and 1960s, the government applied the monetary brakes whenever the balance of payments became negative due to too rapid domestic expansion. This is why the capital account ratio remained close to zero during this period. The Japanese economy therefore was "systematically operated to maximize growth," with wealth a secondary goal.
In addition, as Laffer would expect, the slower growth of the 1970s and 1980s, an increase n pension benefits, and a phasing out of tax incentives for savings led to a decline in the savings rate. A rising capital-output ratio as Japan used up the available technology stock and approached the innovation frontier in a number of industries also had the effect of slowing growth. Slower growth resulted in less depreciation and lower gross savings. However, slower growth did decree investment demand faster than savings, especially individual savings, so the export surplus increased. However,
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