Explaining Growth Slowdowns in a Multisector Model: The Case of Japan

The path of economic development for rich industrialized countries is typically to transit from farming to manufacturing to services. To do so requires corresponding productivity gains to pull the economy from one sector to the next one. For example, the US and Japan developed their manufacturing sectors only after dramatic improvements in the productivity of the manufacturing sector. Then, in the face of growing competition in manufacturing from other economies in the world, the US developed its service sector. This has fueled the growth of the US economy for much of the post-war period. The slowdown in growth in Japan can perhaps be due to two events: (1) a fall in the relative price of their manufactured goods due to increasing competition from other low-wage economies such as China and South Korea, and (2) the lack of productivity improvements in the service sector which prevented them from making the same adjustment as the US did to sustain growth at a moderate level. This paper begins by exploring the quantitative relationships just described by developing a multi-sector growth accounting exercise with an application to Japan. Initial results seems to support this claim: Japan’s terms of trade fell during the 90s and productivity growth in Japan’s service sector are estimated to be below that of other industrialized nations. The latter part of this project aims to explain why productivity in the service sector in Japan has been so low