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Why did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth? Free essay! Download now

Home > A Level > Economics > Why did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth?

Why did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth?

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Downloads to date: N/A | Words: 1000 | Submitted: 28-Mar-2011
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Why did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth? essay previewWhy did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth? essay previewWhy did Japan stagnate for fifteen years, only recently resuming a reasonable pace of economic growth? essay preview

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Twenty years ago, many commentators in the United States were extolling the virtues of Japanese management practices, worrying about Japan's large trade surpluses, and predicting that Japan would soon overtake the United States as the world's leading economic power. In the first four decades after the Second World War, Japan's productivity and GDP rose more rapidly than that of the United States; yet after 1990, Japan stagnated for fifteen years, only recently resuming a reasonable pace of economic growth.

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Twenty years ago, many commentators in the United States were extolling the virtues of Japanese management practices, worrying about Japan's large trade surpluses, and predicting that Japan would soon overtake the United States as the world's leading economic power. In the first four decades after the Second World War, Japan's productivity and GDP rose more rapidly than that of the United States; yet after 1990, Japan stagnated for fifteen years, only recently resuming a reasonable pace of economic growth.

What happened? The conventional story is that excessive corporate debt and a rigid financial system, hampered by an unwise deflationary monetary policy put the brakes on Japanese growth. This is a partial truth; but if we end the explanation there we would fail to recognize a more profound underlying cause of Japan's slowdown.

In the 1950s and 1960s Japan's growth was propelled by the same fuel that drives China today, a high savings rate and a large pool of underemployed labor, which allows manufacturing to boom without driving up wages. By the 1970s, Japan had absorbed its surplus labor, and a new growth dynamic took over: attention to quality and efficiency in manufacturing. But Japan's edge did not survive the IT revolution of the 1990s. Innovation in software and communications technology gave the United States a decisive productivity advantage. Japan could not innovate fast enough, and it fell into a 15-year slump.

If you are not convinced by this argument, try the following mental experiment: imagine that Microsoft, Netscape, Apple, and Google were Japanese companies. Would Japanese growth in the 1990s have lagged so far behind the United States? I think not.
The brilliance of China's leadership is that it has farsightedly recognized the reasons for Japan's failure to innovate, and it is already taking steps to prepare China for a future, perhaps two decades away, in which it can no longer compete globally and win on the basis of low labor costs. Understanding that China must learn to innovate, President Hu Jintao has made innovation and creativity the centerpiece of his current five-year plan.

Avoiding the fate of Japan won't be without its challenges. The secret lies in acknowledging the three principal factors that have contributed to America's decisive advantage in innovation, and then doing something about each of them. The first requisite is for China to achieve world-class stature in basic scientific research, not just in applied engineering, because basic science ...

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