RIETI

2 0 1 1
SpecialEdition37

Highlight

R. WAKASUGIT. ITON. HAMAGUCHIS. NAGAOKA

K. FUKAO

Special Feature

Quake Revival

H. OHASHI

K. TSURU

M. FUKAO

H. TAKEDA

M. FUJITARIETI
Highlight

2011 Special Edition●●
P1

About RIETI

P2

Message from the Chairman●
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Special Report

Research Digest

37

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CONTENTS

Special Feature

Quake Revival
Japan's Recovery by Removing Borders and Decentralization:
From a spatial economics perspective, written by FUJITA Masahisa,
President & CRO, RIETIThe Economic Impacts of Natural and Man-made Disasters and the Effectiveness of
Insurance Mechanisms, interview with SAWADA Yasuyuki,
Faculty Fellow, RIETIPerspectives fromAround the World—A message for Japan●RIETI Policy Symposium●
P16

The First Asia KLEMS Conference—Productivity Growth in Asia

RIETI-RAND Symposium●
P26

What Have We Learned from the Panel Data of the Elderly? For better life and health

Perspectives fromAround the World—A message for Japan●

Scale Startups: Meeting the growth challenge in developed economies after the recession

Perspectives fromAround the World—A message for Japan●

Global Imbalances are Back!

P14

P36

P40

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P44

Securing a Future Energy Supply in a Sustainable Manner, written by
TANAKA Nobuo, Executive Director, IEA

Written by Robert E. LITAN, Vice President, The Ewing Marion Kauffman Foundation

Written by Pier Carlo PADOAN, Deputy Secretary-General, OECD

Introduction of Research Programs

What is
RIETI Highlight?

RIETI's public relations magazine "Highlight" is published quarterly, featuring RIETI's most recent activities with the objective ofdisseminating research outcomes to a wider audience. This special edition has been edited in English in order to reach ourinternational readers.
In this issue, we focus on our special feature, "Quake Revival," in which RIETI has invested much time and effort as part of its contribution
to the early rehabilitation and reconstruction of the disaster-affected area, and introduce to you our major research findings.

About RIETI
What is RIETI?

The Research Institute of Economy, Trade and Industry (RIETI), an incorporated administrative agency, was founded in April
2001 as a government-affiliated policy research institute with a certain degree of independence from the administrative
authorities. RIETI endeavors to analyze and research various policy issues from a medium- to long-term perspective, thereby
accumulating the necessary knowledge to formulate and recommend policy options.

Research framework for the third
medium-term plan (fiscal 2011-2015)
Under the third five-year medium-term plan commencing April 2011, RIETI's mission is to undertake theoretical and empiricalresearch to create a grand design for aligning the Japanese economy on a growth path and solidifying sustainable growth in the
future. To this end, we will proceed with research activity by always keeping in mind the following three "Priority Viewpoints" oneconomic and industrial policies.
1) Incorporating growth of the world economy;2) Developing new growth areas; and
3) Responding to changes in society and creating new economic and social systems for sustainable growth.
Based on the three Priority Viewpoints, nine "Research Programs" have been established. Each program represents a set ofinterrelated policies, which will collectively cover a broad range of policy areas. Several research projects are to be conductedunder this framework, and furthermore, there will also be Special Projects. Our current Research Programs will either be modified
or supplemented on an as-needed basis. For more information, please visit Introduction of Research Programs on page 44.

Three Priority Viewpoints on economic and industrial policies to be
kept in mind when carrying out research activities
1) Incorporating growth of the world economy.
2) Developing new growth areas.
3) Responding to changes in society and creating new economic and social systems for sustainable growth.

Research Programs
International
Trade and Investment

International
Macroeconomics

Regional
Economies

Technology andInnovation

Raising Industrial andFirm Productivity

New Industrial
PolicyHuman CapitalSocial Security,
Taxation, and Public
Finance

Policy History and
Policy Assessment

Special Projects

RIETI Highlight 2011 Special Edition1

Message from the Chairman
The year 2011 turned out to be very challenging for both the Japanese and global economies. The Great East Japan Earthquake that struck
on March 11 was not only a major humanitarian disaster but also dealt a tremendous blow to the companies in the affected areas. Moreover,businesses across a large area had to deal with further difficulties imposed by the restrictions on the use of electricity in the wake of the nuclear
power plant accident. The resulting breakdown in supply chains had repercussions for the production of automobiles in Japan and in the UnitedStates. Although the impact of the nuclear power plant accident is gradually being alleviated, the number of overseas visitors to Japan has
yet to recover fully. Fortunately, given the impact of up to three economic stimulus packages for restoration and reconstruction taken by thegovernment, the real economic growth rate for the third quarter of the current year rose 1.4% from the previous quarter (or 5.4% year-on-year),representing a sharp recovery from the previous contractions. Still, there are many issues to address, including a grand theme of how to achievereconstruction of the afflicted areas while ensuring local growth and employment.
Meanwhile, the global economy in 2011 witnessed ever increasing concerns over sovereign debt in the developed countries. In particular, debt
problems in certain European countries have posed serious concerns for the global financial markets, even undermining the stability of theentire eurozone. Although European nations have been trying to improve their financial situations and eliminate market anxieties, it is indeed adifficult task to control expenditures while increasing public contribution in the face of the severe economic environment. Moreover, regaining
fiscal strength will not guarantee economic revitalization. It is imperative to bolster corporate activities to support wages and employment in the
future, while acting to restore fiscal soundness. In fact, the most recent period of sustained growth in the major developed countries was often
attributed to a growing economic imbalance. These countries need to develop an innovation-driven economy in which economic growth isachieved through vigorous corporate activities, and not by the expansion of economic imbalances.
With both the Japanese and global economies facing many critical issues, research institutions have a responsibility to identify urgently theseissues and propose improvements. These responsibilities are even clearer for an institution like RIETI, which was established as a policy thinktank for the economy and industries. In April 2011, the 11th anniversary of its founding, RIETI launched a third five-year medium-term plan,establishing a number of research programs covering nine fields. It has also committed to seeking actively ways to address significant short-term
economic issues.
For example, through its research and symposiums, RIETI analyzed the Great East Japan Earthquake through the experience of the Great HanshinAwaji Earthquake that occurred in 1995, and identified a number of facts, for instance: 1) the rate of bankruptcies of companies in the affectedareas that had business relationships with financial institutions in the affected areas increased; and 2) the rate of relocation was higher among
companies that were located in high corporate agglomeration areas before the disaster. RIETI has also proposed theories to support post-disasterrevival, finding that while long-term economic growth is often accelerated after major wars or disasters, it is essential to reform comprehensively
the frameworks of regulations and industry to truly revitalize the economy. Meanwhile, RIETI has also been analyzing corporate vitality and otherissues. It is now developing a Japan Industrial Productivity (JIP) database related to corporate productivity and a Japanese Study of Aging andRetirement (JSTAR) database that stores panel data related to the lifestyles and health of elderly people. It is important to measure accurately
corporate productivity and seek to raise it, mainly by improving exports and urban density. This will be a key factor that will determine economic
growth in many countries going forward. We must also seek to understand better the health and lifestyles of people and their economic
relationships, and compare the situation in Japan with that of other major countries so that Japan can take appropriate and effective measuresamid severe fiscal restraints.
The latest RIETI Highlight will introduce research and symposiums related to the Great East Japan Earthquake and the databases developed by
RIETI. I hope that this special edition will provide useful viewpoints to our readers in addressing the critical short-term economic issues.

NAKAJIMA Atsushi was appointed Chairman of RIETI in April 2011.
Profile2011-Present
2004-2011
2001-2011
2000
1999
1975

Chairman, RIETI
Senior Managing Executive Officer & Chief Economist, Mizuho Research Institute, Ltd.
Regular Commentator of World Business Satellite (TV Tokyo)
Chief Economist & General Manager, Research Department, Head Office, IBJ
President, Banque IBJ (France) S.A.
Joined Industrial Bank of Japan, Ltd. (IBJ)

Selected Publications
Nihon no Toppako (Japan's Breakthrough), Toyo Keizai Inc., 2011
Sekaikeizai: Rensasuru Kiki (Global Economy: Chain-reaction Crisis), Toyo Keizai Inc., 2009
Chugoku Jinmingen no Chosen (Challenge of China's Yuan), Toyo Keizai Inc., 2004
Nihon Keizai no Risuku Sinario (Risk Scenarios for the Japanese Economy), Nihon Keizai Shimbun, Inc., 2004

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RIETI Highlight 2011 Special Edition

Special Feature

Quake Revival
The Great East Japan Earthquake that struck on March 11, 2011 caused significant damage not only in the Tohoku region,
the area most immediately affected, but also to the Japanese economy, notably the auto industry, through a breakdown
in supply chains. Moreover, in the wake of the accidents at the Fukushima Daiichi Nuclear Power Plant, a number ofnuclear power plants suspended their operations, resulting in a serious shortage of electricity. Consequently, last summer,
the government decided to impose energy restrictions on major users of industrial electricity. It also called on smaller
electricity users and individual households to cut voluntarily their power consumption by 15%.
Work on restoration and reconstruction has been underway since the disaster, but the economic reconstruction of theaffected areas still has a long way to go. Moreover, issues related to the Japanese overall economy remain unaddressed,
such as how to develop systems of production that can take advantage of industrial agglomeration, yet remain resilient
against disasters, or how to overcome restrictions on electricity supply, which are expected to be in place for some years.
To develop appropriate policies to address these issues, it is important to understand accurately the realities of thedisaster-stricken areas and the Japanese economy, and conduct extensive theoretical and empirical analyses.
RIETI was researching the economic impact of natural disasters even before the March earthquake, and immediately
following the disaster, it has been actively proposing a range of policies. It has also been undertaking researchcontributing to reconstruction efforts, taking the perspectives of industrial concentration, regional productivity, andenergy supply and demand, among a range of other viewpoints. In this latest special feature, we will introduce some of
the initiatives that RIETI has been pursuing.

CONTENTS
Special Report●
Research Digest●● Perspectives from Around the World—A message for Japan
P4

P7

P14

Japan's Recovery by Removing Borders and Decentralization:
From a spatial economics perspective, written by FUJITA Masahisa, President & CRO, RIETIThe Economic Impacts of Natural and Man-made Disasters and the Effectiveness of
Insurance Mechanisms, interview with SAWADA Yasuyuki, Faculty Fellow, RIETI
Securing a Future Energy Supply in a Sustainable Manner, written by TANAKA Nobuo, Executive Director, IEA

RIETI Highlight 2011 Special Edition

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Special FeatureSpecial ReportJapan's Recovery by Removing
Borders and Decentralization:
From a spatial economics perspective
August 2011

FUJITA Masahisa
President and Chief Research Officer, RIETI / Professor, Konan University
On July 29, the Japanese government established the
Basic Policy on Reconstruction from the Great East Japan
Earthquake. Although the reconstruction project is on theorder of 23 trillion yen over 10 years, the vital issue of how
this project is to be funded remains a subject for future
discussion. The new Cabinet led by NODA Yoshihiko, who
was named prime minister on August 30, is required to create
and implement quickly a specific plan for reconstruction. This
column aims to give an outlook for the future course of Japanthrough the reconstruction from the perspective of spatial
economics.
Spatial economics is a new field of economics that analyzes
dynamic changes in intercity, interregional, and international
spatial economic systems by focusing on agglomeration forces(improvement in productivity and creativity) arising from theproximity of diverse human activities and the complementary
relationships among them. Its fundamental task is to analyze
the process in which diverse activities of production andconsumption form a variety of agglomeration at municipal,

P r o f i l e
FUJITA Masahisa is RIETI's president & chief research officer andconcurrent professor at Konan University. His expertise includes urban
and regional economics, regional development, spatial economics andinternational economics. He obtained his Ph.D. in regional science fromthe University of Pennsylvania in 1972. Prior to his current position,
he was a professor at the Regional Science Department, University ofPennsylvania (1986-94) and a professor at the Department of Economics,
University of Pennsylvania (1994-95). He is a member of the American
Economic Association, the Japanese Economic Association, theEconometric Society, and the International Regional Science Association.
Selected publications include Economics of Agglomeration (written with J.
F. Thisse, Cambridge University Press, 2002), The Spatial Economy (writtenwith P. Krugman and A. Venables, MIT Press, 1999), Urban Economic
Theory (Cambridge University Press, 1989), and others.

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RIETI Highlight 2011 Special Edition

regional, and national levels in close interactions on the one
hand and decentralization on the other through a tradeoff
between economies of scale in individual production activities
and transport costs in a broad sense (see Figure).

Economies ofscale

Tradeoff

Transport costs

Agglomeration/
dispersion

Risks
Figure: Fundamental task of spatial economics

Quake Revival
The Great East Japan Earthquake was the first massive andincentive in Japan for a single company to mass-produce eachcomplex disaster in history that included an earthquake, apart in a single location and transport such parts to places

tsunami, a nuclear power plant accident, power supply failure,

all over Japan and some to other countries. A dense networkand large-scale disruptions of supply chains. It became clearof supply chains is established all over Japan, and eachthat the tradeoff between economies of scale and the risks

manufacturer has been engaged in highly efficient production

resulting from diverse natural and man-made disasters is anwhile reducing inventory to a minimum. Such efficiency-

essential issue to be addressed when thinking of the desirable

oriented management of supply networks backfired in thespatial structure for Japan.

wake of the earthquake.

Japan was at an impasse even before the earthquake, faced

Japanese companies showed remarkable responsiveness onwith many fundamental problems. Japan should aim not justthe frontline of production and restored supply chains at a

at a recovery to the state before the earthquake but also at a

rate greater than initially expected with production almost

creative recovery that leads to a new future for Japan.

normalized in the manufacturing industry at the time of

The experience of the Great Hanshin-Awaji Earthquake could

writing. Nevertheless, production at present has merely been

be a useful reference for thinking about a creative recovery

rehabilitated to its original state. Placing the highest priority

from the earthquake. Although the Port of Kobe achieved fullto the speed of restoration, rather than taking a "building backrecovery from a devastating disaster in the short period of two

better" approach, was an inevitable choice, given the need toyears and two months, its function as the international hub

avoid the hollowing-out of Japan's advanced manufacturing

port in East Asia had already been overtaken by Busan andindustry. This, however, leaves Japan with the challenge ofShanghai. This fact demonstrates that the lock-in effects of acreating more resilient supply chains both within and across

hub of the international maritime transport network cannot

its national boundaries. We need to address this issue without

be recaptured once it is lost. It is also a telling reminder of thedelay in order to avoid the risk of Japan being excluded fromdifficulty of a creative recovery.

global procurement networks, as there is strong pressure

Transforming the disaster into a creative destruction leadingon components and materials manufacturers from both theto new growth is a task that requires exceptional resolution,

domestic market and overseas markets to disperse production.

energy, and time. As it appears, however, Japan has been

The point is how to disperse risk while taking advantage offorced, rather than by choice, to change itself drastically. Thiseconomies of scale, and we can take three basic policies tois indeed the greatest crisis since World War II. But Japan

achieve that end: 1) virtual dispersion of plants through amust turn it into an opportunity to bring about fundamental

business continuity plan (BCP) or a similar plan, 2) physicalchanges by making united efforts and taking decisive steps.

dispersion of plants inside Japan (for instance, to western andOtherwise, Japan's decline will continue.

eastern Japan) or across national borders, and 3) thoroughLet us consider the direction to be taken in reconstructing thedifferentiation of core components and materials—thoseJapanese socio-economic system by focusing on the preferredconstituting the source of competitiveness—throughpath for recovery in the Tohoku region. The principal thrust

continual (technological) innovation and by making clear

should come from borderlessness and decentralization.

distinction between two strategies for parts and components,

First, let us consider the target direction for developmenti.e., commonalization and differentiation. We must find theof the Japanese manufacturing industry in relation to thebest mix of these three policies to reconstruct more resilient

problem of supply chains. Although the areas directly struck

supply chains in Japan and abroad.

by the earthquake were mainly four prefectures in the Tohoku

In doing so, it is necessary to be capable of responding to aand Kanto regions (Iwate, Miyagi, Fukushima, and Ibaraki),change in the major trend of the world economy, taking thethe entire manufacturing industry in Japan and part of thelessons learned from the failure of the complete restoration

manufacturing industry abroad were forced to suspendof the Port of Kobe. Conventional global supply chains of

production.

Japanese corporations have been constructed for consumer

A single automobile is manufactured by assembling 20,000-

markets in advanced Western countries. In this century,

30,000 parts and materials. Economies of scale work for the

however, it is in emerging countries where a large expansion

production of each part. With an established transportationin the demand for industrial products is expected. In order toinfrastructure and low transport costs, there is a strong

participate in global growth, current global supply chains and

RIETI Highlight 2011 Special Edition

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Special FeatureSpecial Report
corporate strategies must be fundamentally reviewed, andimproving advanced knowledge absorbed from WesternJapanese companies must depart from their management

countries, the traditional Japanese socio-economic system

practices centered on Japanese personnel.

focusing on common knowledge functioned well. However, if

To ensure progress in the global economy, each company

Japan is to develop as a knowledge-creating society in the current

should boldly promote overseas operations. On the otherage of globalization, it must cultivate the frontiers of knowledge

hand, the Japanese government should prevent thenot only in the area of science and technology but also in broader

hollowing-out of the manufacturing industry by retaining inareas including society and economy. For this purpose, it isJapan those core components, materials and manufacturing

indispensable to reconstruct a socio-economic system whichmachinery industries, that are the source of competitivenessemphasizes the specific knowledge of each individual and is muchfor Japanese advanced manufacturing industries, and makemore diverse and autonomous than before.

efforts for attracting foreign investment. Specifically, theThe realization of doshusei is preferable in order to develop

government should make all-out efforts to bring the nuclear

highly autonomous and diverse regions. This is exemplified

power plant accident under control and ensure the stableby the fact that, in recent years, the majority of the top 10

supply of power, promote free trade agreements (FTA) and

Organisation for Economic Co-operation and Development

economic partnership agreements (EPA), reduce the corporate(OECD) countries on a per capita GDP basis have been small

tax rate to the international level, prevent a rise in the value ofcountries in northern Europe. The average population of

the yen, and resolutely implement a mid-to-long-term growththese countries is about 6.3 million, which is smaller than thestrategy.

total population of the six prefectures in the Tohoku region

A number of experts and business leaders, including(about 9.3 million). The aforementioned countries have

MITARAI Fujio, chairman emeritus of Keidanren (Japantheir own language and culture as well as unique industrial

Business Federation), have proposed the establishment ofconcentration and economic, social, and educational policies

a headquarters with comprehensive supervisory powers

and have developed knowledge-creating societies rich inin the Tohoku region, in view of a possible transition to adiversity.

new regional administrative system referred to as doshusei

We can therefore see that a large-scale population is notprovincial system in the future, for leading the rapid

very essential for a country to develop as a member of theimplementation of recovery measures. I also support thisknowledge-creating societies. Japan can be revitalized as

proposal.

a knowledge-creating society if a decentralized system ofSpecifically, the Reconstruction Agency, whose establishment

government based on doshusei—rich in autonomy andis specified in the Basic Act on Reconstruction from thediversity—is constructed by drastically reexamining theGreat East Japan Earthquake, or its de facto executive organ

division of roles between the national and local governments

should be established in the Tohoku region as a basis for thewith a view to promoting regional competition andprospective "Province of Tohoku." I would like to propose

collaboration.

realizing doshusei by gradually extending this prototypical

It is necessary to develop the whole Tohoku region as a placesystem to other parts of Japan. This is necessary also forrich in diversity for innovation that enables participation by all

reducing the impact of the paralysis of urban functions instakeholders. For instance, the region can be expected to play

Tokyo, which could result from the direct impact of a near-a major role in the comprehensive technological development

field earthquake.

of renewable energy and the construction of a relevant social

The centralized nation state with Tokyo as its capital,model. The Japanese government needs to improve support

which emerged via the abolition of feudal domains andfor university research centers in the Tohoku area and boldly

the establishment of prefectures in the Meiji Restoration,

promote industry-academia collaboration by utilizing a system

functioned well in the phase during which Japan tried to catchof special reconstruction zones and other means.

up with Western industrialized societies. Japan's stagnation

Hardware-related scientific technology alone cannot make theafter the collapse of the Japanese bubble economy, however,Tohoku region an attractive area, however. It is presumably

indicates that the entire Japanese socio-economic system has

important to proceed with post-disaster reconstruction bya major structural problem.

involving experts in economics, business management,

In the days when growth was possible by modifying andculture, and art.

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RIETI Highlight 2011 Special Edition

Quake Revival

Research Digest is a clear and concise
summary of main points and issues with
policy implications that have been raised in
RIETI discussion papers.

The Economic Impacts
of Natural and Manmade Disasters andthe Effectiveness of
Insurance Mechanisms

Natural disasters, such as earthquakes, tsunamis, typhoons, and floods, and man-made disasters,such as wars and economic crises, significantly affect the lives of every individual and society
in general. The limited resources used for dealing with these disasters must be distributed
appropriately based on scientific evidence. To help achieve this, Faculty Fellow SAWADA Yasuyuki
undertook a comparative study of the economic effects of a broad range of disasters, using data
available for comparing results from countries around the world over a long time frame startingfrom 1960. Professor Sawada also examined the effectiveness of risk sharing mechanisms against
disasters in developing nations, where natural disasters produce more serious effects, using datafrom Vietnam. Through these studies, Professor Sawada found that although all disasters produce
short-term negative effects on the economy, with natural disasters and wars having particularly
adverse effects, in the long run, natural disasters and wars produce positive economic effects, while
economic crises have continuous negative effects. Professor Sawada argues that comprehensive
short-term policy interventions are needed for dealing with natural disasters, while long-term
measures are essential for addressing economic crises. A policy should take into account theeffective allocation of limited resources across different disasters.

Has the Number of Disasters
Risen Sharply in Recent Years?

be increasing. The great—Professor Sawada, you published two
papers on disasters in succession. Tell us firstabout the motive for your research titled,"Aggregate Impacts of Natural and Man-madeDisasters: A quantitative comparison."the great tsunami in the( ☞ http://www.rieti.go.jp/jp/publications/dp/11e023.pdf)(1995) are still fresh inearthquake in Sichuan
Province, China (2008),
Indian Ocean (2004),
Hurricane Katrina (2005),
and the Great HanshinAwaji Earthquake
our memories. And, ofI began this study about two years ago. It started with mycourse, the Great East

impression that the occurrences of natural disasters might

Japan Earthquake, the

RIETI Highlight 2011 Special Edition

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Special Feature
Research Digest

devastating earthquake in Haiti, and volcanic eruptions in
Iceland have taken place in more recent years. These natural
disasters, which have significant adverse effects on people's
lives, have been occurring around the globe at a rapidly risingfrequency in the last 20 years or so. Data suggests that floods
and other hydro-meteorological disasters, such as typhoons
and hurricanes, have strikingly increased. Besides thosenatural catastrophes, there are other disasters—the Lehman
Brothers collapse, the Asian currency crises, the economic
crises in Mexico and Argentina, wars, civil wars, terrorist
attacks, other violent disasters, the nuclear power plant
accidents that accompanied the Great East Japan Earthquake,
the Japan Railway Company (JR) Takarazuka Line derailment,

SAWADA
Yasuyuki
Faculty Fellow, RIETI
Professor, Graduate School of Economics,
The University of TokyoP rofile
SAWADA Yasuyuki has been a professor of Economics at the Universityof Tokyo since 2012. He was previously an associate professor
in Faculty of Arts and Sciences and Faculty of Economics at the
University of Tokyo since 1999. His fields of research are Development
Economics, International Economics, and Applied Micro-econometrics.
He holds a Ph.D. in Economics from Stanford University, an M.A. in
International Development Policy from Stanford University, and an M.A.
in International Relations from the University of Tokyo.
Recent works include: "Did the Financial Crisis in Japan AffectHousehold Welfare Seriously?" Journal of Money, Credit, and Banking
43 (2-3), 297-324, 2011 (co-authored with NAWATA Kazumitsu, II
Masako, and Mark J. LEE); "How do People Cope with Natural Disasters?
Evidence from the Great Hanshin-Awaji (Kobe) Earthquake," Journal of
Money, Credit, and Banking 40 (2-3), 463-488, 2008 (co-authored withSHIMIZUTANI Satoshi)

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RIETI Highlight 2011 Special Edition

Quake Revival
The Economic Impacts of Natural and Man-made Disasters and the
Effectiveness of Insurance Mechanisms SAWADA Yasuyuki

and airplane crashes—which could be called "technologicallength of time post-disaster, disaster type, and the size ofdisasters." We can lump economic crises, violent disasters,

the country's GDP. Let me first talk about the differences

and technological disasters together and call them "man-caused by time. When we look at global averages in short-made disasters." Disasters tremendously affect the lives of allterm periods of one to three years, natural disasters produce

individuals and society as a whole. For that reason, people

the largest downward effects on per capita GDP. A single

intensely focus their attention on major disasters as theynatural disaster can lower per capita GDP by an annual rateoccur. However, interest in the disasters weakens rapidly, theof about 1%. Conflicts and wars cause the second largest

media scales down its coverage, and relief donations shrink

effect on per capita GDP. Both lower the figure by an annual

over time. These are the so-called "cognitive biases." As forrate of 0.4 to 0.5%. Economic crises follow conflicts andpolicy response to disasters, while correcting the bias thatwars, but their downward effect on per capita GDP is limited

results from "cognitive biases" and distinguishing a short-term

possibly to 0.2% per year.

axis from medium- and long-term axes, distributing limited
resources appropriately will be a critical issue. Building upon
this, as a premise for developing responses, I came up with theTable: Effects of Disasters on Per Capita GDP (Annual Rate)

idea of comparatively analyzing the effects caused by various

Short term
(1 year)Long term(20 years)

Naturaldisasters−1 to −0.7%+0.6 to +1.2%

Conflicts andwars−0.5 to −0.4%+0.4 to +0.9%

Economiccrises−0.7 to −0.2%−0.5 to 0%

disasters from an empirical standpoint.

—What kind of data did you use for youranalysis?
I chose data that would allow me to compare results overa long time frame starting from 1960, based on macro dataobtained from more than 100 countries. I made sure to show
clear scientific evidence of disasters that have had large
impacts on people's lives, using gross domestic product (GDP)and consumption levels as indicators.

In contrast, I found that natural disasters, conflicts, and wars
work in the opposite direction over the long term and canNatural Disasters and Wars
Produce Positive Effects in theLong Run

push up per capita GDP. Based on my analysis of their effects
over 20 years, natural disasters increase per capita GDP by 0.6
to 1.2% per year, while conflicts and wars produce upwardeffects of 0.4 to 0.9%. However, the effects of economic
crises remain negative at minus 0.5 to 0% even over the long

—What did your analysis reveal?

term (as shown in the table).

The analysis showed that the effects of disasters on a given

Next, let me explain the differences attributable to thecountry's economy differ depending on factors such as thesize of GDP. Natural disasters cause extremely large short-

RIETI Highlight 2011 Special Edition

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Special Feature
Research Digest

term adverse effects on countries with low per capita GDP.
In contrast, wars create a significant negative impact on

Economic Crises RequireLong-Term Involvement

countries with large per capita GDP. Previous studies proved
similar results that the effects of natural disasters and wars
switch from negative to positive over the long term. To—What kinds of policy implications can you
draw from your study?

give an example, there is a research paper showing thatJapan recovered surprisingly quickly from its serious loss

We must take comprehensive measures in the immediateof domestic capital stock, a negative repercussion of World

wake of natural disasters because they produce extremely

War II.

large adverse effects within short periods of time. In themeantime, we must involve governments in initiatives against

As a cause of the positive long-term effects that theeconomic crises for extended periods because their adverse

given disasters produce, previous studies suggested theeffects continue over the long term.

amplification of economic activities caused by accelerated
moves toward shakeout of firms, in other words, as a

—What future research are you planning?

result of the forced withdrawal of relatively unproductive
companies and the survival and growth of highly productive

Many catastrophes occur concurrently. An economic crisis

companies under the effects of the disasters. This is theoccurred immediately after the Great Kanto Earthquake. In

process Joseph A. Schumpeter called "creative destruction,"

Africa, there were cases in which natural disasters caused

although when attributable to disasters, "creative

economic crises, which further led to conflict. In the latest

destruction" may not be an appropriate expression from theGreat East Japan Earthquake, natural disasters also caused

standpoint of companies and households that have sufferedtechnological disasters, such as the nuclear power plant

unexpected, severe property and human damages.

accident, which led to a major catastrophe. I must study the"mechanisms" behind these "combined" disasters more closely.

In the meantime, concerning the negative effects that
economic crises have on both short- and long-term bases,
we can assume the following possibility. Natural disasters
cause visible physical damage. The processes of recovery
and reconstruction also become visible. Political agreements

Insurance Markets in
Developing Countries are
Undevelopedon recovery and reconstruction investments are assumed

geographically-limited areas, they greatly affect small—Please tell us about your second paper,"Self-production, Friction, and Risk Sharing
against Disasters: Evidence from a developing
country." What were your motives for studying
the relationship between disasters and theeconomy of a developing country in the paper?

nations but have limited effects on large nations.

( ☞ http://www.rieti.go.jp/jp/publications/dp/11e017.pdf)

to be straightforward for that reason. On the other hand,as economic crises are largely intangible, decision making
may take extra time, and sometimes effective prescriptions
may not be known. As for the differences attributable toeconomic scale, because natural disasters generally cover

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Quake Revival
The Economic Impacts of Natural and Man-made Disasters and the
Effectiveness of Insurance Mechanisms SAWADA Yasuyuki

A number of problems

economic journals. However, these studies did not set apartassociated with risks haveself-consumption that is essential in the farming regions

emerged in developingof developing countries from total consumption. I thoughtcountries because of theirthat an explicit analysis of self-consumption through thisundeveloped markets.

research would significantly contribute to the prior studies

These problems include

because it is assumed to be a key factor for addressing risks

the weak functioning of

independently in the farming regions of developing countries.

valid market mechanisms

In addition, very little prior research had analyzed risk sharing

against "weather risks,"

against natural disasters. I picked Vietnam for this study foror the risks of weather

several reasons. First, an outbreak of avian influenza, a serious

affecting the harvest ofnatural disaster, caused enormous damage to the country.

agricultural products

Second, Vietnam suffers from floods almost every year. The

that comprise a key industry in developing countries;

risks of natural disasters in general are high as indicated by its"health risks," or the higher risks of infectious diseases andclassification as Level 4, the second-highest risk group among

other health problems in tropical regions; and "contractual

the five natural disaster risk categories established by therisks" attributable to weak legal foundations for contract

United Nations International Strategy for Disaster Reduction

enforcement in various economic transactions. Among(UNISDR), the UN agency responsible for disaster prevention

these risks, natural disasters are particularly serious. Data

programs.

for natural disasters by country show that the probabilityof an occurrence is the same for advanced and developing
countries. Compared to developed countries, developing—What are the characteristics of the data
you used for analysis?

countries have insufficient central government policies andmarket functions, and these cause disasters to produce greater

In selecting data, I felt that it must be representative ofhuman and economic damage. To approach this problem, I

Vietnamese households. As such, I tried to expand on multi-

wanted to study how disasters are related to economic welfare

purpose household survey data from the Vietnam Household

in developing countries on a micro level, in other words, from

Living Standard Survey 2006 (VHLSS 2006), which the General

the perspectives of citizens and households.

Statistics Office of Vietnam (GSO) conducted as a nationwide
survey that year. For this study, we selected about 2,000—Why did you focus on risk sharing in selfproduction and consumption?

households, or all subject households in four representative
regions of Vietnam, from those studied in the VHLSS 2006,
surveyed them on items related to our study objectives at the

A significant number of studies had been conducted on

beginning of 2008, and constructed panel data by matchingwhether consumption risk sharing is achieved by exchanging

the results with the VHLSS data. As our four survey regions,daily necessities such as food in a community; in other words,

we chose one area that sustained serious damage from bothwhether people living in a village actually help each other.

avian influenza and flooding, one area each which sustained

Many papers on this subject have been published in leading

serious damage from avian influenza or flooding, and one

RIETI Highlight 2011 Special Edition

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Special Feature
Research Digest

area which was lightly damaged by both. The ratio of self-

by adjusting self-consumption is taken into consideration.

consumption to total consumption averaged 40% in these

Our research also showed that the analysis results from theregions, which are dominated by farming villages. We alsoearlier studies arose from omitted variable biases of self-

distinguished self-consumption from consumer expenditureconsumption variables. The second point is the substancein both the VHLSS panel data and our self-procured data. Withof sharing mechanisms. We can think of various modes ofthese steps, we prepared household panel data that showedsharing, including direct exchanges of actual goods, suchhow disasters affected consumption and income from 2006

as money and rice, and labor exchanges, in which anotherto 2007. In preparing questions for the follow-up survey,

person performs agricultural work in place of a person

we devised a way to show people's subjective probabilities

unable to work. Through our analysis, we learned that theof avian influenza outbreaks and floods, the amount theymechanism of risk diversification by means of money lending

are willing to pay for buying and staying in a hypotheticaland borrowing is particularly important in Vietnam. The third

disaster insurance program, and their risk tolerances, aiming

point is a "commitment" to sharing. There is the theoreticalto develop an understanding of contentions such as "people

possibility that spontaneous sharing mechanisms will notthink natural disasters will not befall them before they occur,"function when personal conditions are favorable, because

which are often discussed in behavioral economics.

under those conditions, a latent incentive for leaving mutual
assistance mechanisms and offering no help to other people

Sharing Does Not Function in
Geographically Extensive
Disasters

arises. However, our study found no support for this hypothesis—What did you find through your analysis?

—What kind of policy implications can you
draw from the results of your second study?

in communes in Vietnam. I believe a strong relationship oftrust that exists among people is one of the factors behind theeffective operation of sharing mechanisms there.

We found that no mechanism of pooling risks for consumption
risk sharing was present within the broad framework of a

Through this research, we found that sharing mechanisms

province, which comprised a subject area of our research. In

worked well at the commune level, but they did not function

other words, we can say that mutual assistance mechanisms

over a broader space. Thinking about it, this is quite natural.

are unlikely to form in response to geographically extensive

We must support formal insurance market transactions to

disasters. However, risk sharing mechanisms appear to function

ensure that risk sharing functions properly across broader

well in units called communes, which are groups of smallerareas. A scheme called crop insurance, in which compensation

territories such as villages. Many of the earlier studies in India

is paid for crop failures, is one possible approach. However,and Pakistan showed that sharing mechanisms do not function

traditional indemnity-based crop insurance is known to work

completely even within villages in developing countries.

poorly in developing countries because damage verification

Through this study, we found the possibility that sharing

is difficult and costly. To deal with this problem, new "index-

may function within villages in a way that is supplemented

based" insurance programs have been designed with schemes

by self-help, when a self-help approach to dealing with risks

such as insurance payment for total rainfall below a pre-fixed

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Quake Revival
The Economic Impacts of Natural and Man-made Disasters and the
Effectiveness of Insurance Mechanisms SAWADA Yasuyuki

threshold, using indicators outside human control, such as

I can say three things. First, natural disasters produce negative

rainfall, as "indices." The World Bank and other international

effects in the short term, but the effects prove positive inagencies are using these "index-type insurance programs" inthe long run. This is what we found through our first study.

pilot experimental programs around the world. The programs

However, a closer investigation of the results caused by

are also used in commercial insurance contracts in places

the type of natural disaster reveals that quake and tsunami

like India. This kind of fresh thinking will be required goingdamages make no contribution to economic growth overforward. Natural disasters cause incomes to shift dramatically.

the long term. In the Great East Japan Earthquake, a tsunami

Yet it is difficult for people to build an informal pooling anddestroyed entire towns. The adverse effects of this major

sharing scheme against very significant risks that negatively

quake will remain for an extended period because the physicalaffect large areas, such as avian influenza outbreaks anddamage will be so persistent. For that reason, recovery andfloods. For that reason, in the future, we must design schemesreconstruction will require patient efforts over a very long

against natural disasters, such as index insurance. For sometime, in addition to short-term assistance.

time now, a number of international organizations havebeen experimenting in collaboration with partners such as

Second, we must distribute our limited funds and resources

global reinsurance companies in an attempt to develop theseto implement various policies in a level-headed way in orderschemes.

to keep the negative effects of this disaster to a minimum.
We should always bear in mind the "biases" that may—What future research are you planning?

arise in the course of recovery and reconstruction, such as
resource distribution limited to the political limelight andI would like to pursue projects designing actual insurance

policy issues easily tackled. We need policy debate based oncontracts with non-life insurance companies. I also hope toscientific evidence to achieve a "efficient and well-balanced

undertake carefully-designed experiments and econometric

distribution" of limited state resources. Gathering data thatinvestigations to verify the effectiveness of insurance

can serve as a basis for this debate is indispensable. Studies

mechanisms.

should prevent the debate from being too heavily influenced
by political dynamics, playing the role of a "compass" for

Recovery and Reconstruction
from the Great East Japan
Earthquake Will Takea Long Time

designing and executing policies.
Third, actively articulating the knowledge we created, sharing
it within Japan and overseas, and turning it into an "global
public good" are all extremely important. The damage to Japan
from the recent earthquake was enormous. If too many people—What policy implications can you draw on
the economic effects of the Great East Japan
Earthquake and reconstruction of quakestricken areas in the future, based on thefindings of your two studies?

fall into a condition known in psychiatry as "disorientation,"calm judgment becomes difficult, panic occurs, and society isthrown into turmoil. We must accumulate and share quality
evidence to prepare ourselves for these situations and to draft
better policies in the future.

RIETI Highlight 2011 Special Edition

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Special Feature
Perspectives from Around the World — A message for Japan

Securing a Future Energy
Supply in a Sustainable Manner
July 2011

TANAKA Nobuo
Executive Director, International Energy Agency (IEA)

O

n 23 June, for the thirdtime in its history,

the IEA announced that its
member countries would
release emergency stocks ofoil. The release of 60 million
barrels of oil for a period of
one month was in responseto the ongoing disruptionof oil supplies from Libya, a
problem whose effect has
become more pronounced
as it has continued. The normal seasonal increase in refiner
demand expected over the summer will exacerbate theP r o f i l e
TANAKA Nobuo took over as Executive Director of the IEA on
September 1, 2007. Prior to that, he had been Director for Science,
Technology and Industry at the Paris-based Organisation for
Economic Co-operation and Development (OECD).
He began his career in 1973 in the Ministry of Economy, Trade andIndustry (METI) in Tokyo. He has extensive national government
and international experience within METI, the Embassy of Japan in
Washington D.C. and OECD.
In the energy field, he was responsible for Japan's involvementwith the IEA and the G7 Energy Ministers' Meeting during thesecond oil crisis. In the late 1980s, he participated in establishing
the comprehensive energy policy of Japan and he also oversaw the
implementation of Japan's international nuclear energy policy andled negotiations of bilateral nuclear agreements. He worked on
formulating international strategy as well as co-ordinating domestic
environment policy and energy policy in the Kyoto COP3 negotiation.

shortfall further. Greater tightness in the oil market threatens toundermine the fragile global economic recovery. The collective

longer term. Our reports and analyses discuss the future energy

action by the 28 member countries is intended to help bridgelandscape in terms of affordability, security and environmental

the gap until sufficient additional oil from producing countries

sustainability. This task is complicated by uncertainties today

reaches global markets.

such as a still-shaky economic recovery, a veritable revolutionTin unconventional gas production which has upended previous
his action surprised the oil market, as the Libyan disruption

projections, the direction of climate change negotiations, policy

was already going on for four months without IEA action.

choices in those emerging countries that account for the bulk of

But we have expressed our concern several times during thoseenergy demand growth, political events in the Middle East andmonths and with additional demand in the third quarter on

North Africa, and policy implications of the Fukushima nuclear

the radar, for which we saw insufficient additional supply, we

incident. I would like to focus in this article on our latest findings

could no longer wait. So, we moved in a pre-emptive manneron the implications of Fukushima, on whether we are entering a

to ensure a soft landing for the global energy markets ahead.

"golden age of gas," and on Japanese energy policy.

Of course, the IEA is ready to release more oil onto the market
if necessary, and this release represents only a tiny fraction of
overall strategic stock levels.

WIn the wake of Fukushima, we have been developing alower-nuclear case, in which nuclear power's share of thetotal electricity mix drops from 14% to 10% by 2035. Initial

hile mitigating the effects of short-term disruptions

findings show that a slowdown in nuclear power, coupled withby taking emergency measures remains our central

disappointing climate-change negotiations at Copenhagen andfocus, the IEA continues to provide benchmark analysis on

Cancun, would make it practically impossible to limit emissions

future energy outlooks and policy recommendations over theto a level concurrent with the long-term stabilization of the

14

RIETI Highlight 2011 Special Edition

Quake Revival
atmospheric concentration of greenhouse gases at 450 ppm. This

lower in the high-gas scenario, due to higher energy demandis the level that, according to the Intergovernmental Panel on

and the displacement of some renewables. Under low-nuclear

Climate Change (IPCC), gives the world a 50% chance of limiting

power, high-gas, and indeed all our scenarios, electricity fromthe global average temperature increase to 2 degrees Celsius.

renewable energy is vital. Neither of these recently developed
scenarios changes the need for massive investments in low-To make up the slowdown of nuclear power, coal demand in

carbon fuels and efficiency measures to achieve lower CO2

2035 would increase by 130 million tonnes of coal, whichemissions.

is roughly equivalent to the current level of Australian steamcoal exports. Gas demand would rise by 80 billion cubic metres,
roughly equivalent to the current gas production of Qatar. And
additional generation from renewable sources would reach 460

H

ow do we see Japan in the global energy scene, especiallyafter the Fukushima event? The priority today is to bring

the damaged Fukushima Dai-ichi plants to cold shut-down.

terawatt-hours, or about five times the current generation from

Also, it is imperative that power shortages be avoided overrenewables in Germany. Prices of electricity will generally rise,

the summer by engaging every power source available whileenergy security will suffer from less diversity in the energy mix

shaving peak electricity demand. Once this critical stage isand higher import dependence, and CO2 emissions will riseover, the government intends to conduct a drastic review of its

with increased use of fossil fuels. We could see an increase inenergy policy, namely the Basic Energy Plan, in which nuclear

the growth in emissions from power generation of about 30%

power is highlighted as a key power source, supplying 50% of

by 2035 compared with our base-line New Policies Scenario.

electricity by 2030. I truly hope that serious discussions take

We already see countries, particularly in Europe, moving away

place before jumping to conclusions, duly taking into accountfrom nuclear power and making up for the future shortfall

the various elements of energy security, cost and environmental

with a substantial expansion of renewable energy technology

issues. Especially given Japan's limited energy resource

deployment. However, in order to still meet climate-change

endowments, moving away from nuclear power would result

targets, investments will be required in the fossil fuels sector as

in an even heavier import dependency on fossil fuel. Promoting

well. Germany will need to import an additional 16 billion cubic

renewable energy is important, of course. Former Prime Minister

metres of gas to replace much of its coal-fired generation by the

Kan's commitment to increase the share of renewable energy ingovernment's 2022 nuclear phase-out date.

the generation mix to at least 20% by the 2020s at the earliest

T

is an ambitious one, and exceeds the measures of the IEA's
his is only one contributor to an increasing role for gas

450 ppm scenario. In terms of energy security, such decisions

and, as such, we have recently released the Golden Ageshould be carefully implemented based on a strategic energyof Gas Scenario. This one assumes a rapid increase in gas

design. Crucial elements of that design must include stable andconsumption due largely to low prices from the expansion ofsafe nuclear power supply and further grid interconnection at

unconventional gas exploitation. In this context, global primary

the national level, and perhaps even across East Asia. Moreover,natural gas demand rises by around 600 billion cubic metres

we expect Japan to continue to provide global leadership into 2035 compared to the reference case, increasing from 3.3

the areas of energy efficiency and low-carbon economy bytrillion cubic metres in 2010 to 5.1 trillion cubic metres in 2035,

developing the most innovative and cutting-edge technology

or over 50%. The combined effect of a strong increase in naturalin the energy and environmental fields. The IEA has consistently

gas demand throughout the Outlook period, and a decline

called for an "energy technology revolution" that wouldin global coal demand from around 2020 onwards, results inencompass energy efficiency, renewables, nuclear power,

global demand for natural gas overtaking coal before 2030 tocarbon capture and storage, as well as smart grid and electric

become the second-largest fuel in the primary energy mix, after

vehicles to realize a secure and sustainable energy future. Thereoil. However, even if this scenario represents a "golden age" foris no silver bullet. While we see encouraging developments, wegas, it may not be a "golden age" for sustainability. An increased

must further accelerate and lock in the revolution in all areas

share of gas in the global energy mix is far from enough on its

by designing a better and more innovative energy market in

own to put the world on a carbon emissions path consistentJapan. Certainly Japan should take advantage of its low-carbon

with a global temperature rise of no more than 2 degrees

technologies and cultivate business opportunities ahead.

Celsius. Our analysis shows that emissions are only negligibly

RIETI Highlight 2011 Special Edition

15

RIETI Policy Symposium

The First Asia KLEMS Conference:
Productivity Growth in Asia
July 27, 2011

"World KLEMS and Asia KLEMS"
Dale W. JORGENSON
Samuel W. Morris University Professor, Harvard University
P r o f i l eDale W. JORGENSON is the Samuel W. Morris University Professor
at Harvard University. He served as Chairman of the Departmentof Economics from 1994 to 1997. He is a member of the American
Philosophical Society, the National Academy of Sciences, the American
Academy of Arts and Sciences, and the American Association for the
Advancement of Science. He was President of the American Economic
Association in 2000, President of the Econometric Society in 1987, andrecipient of the John Bates Clark Medal of the American Economic
Association in 1971. He is the author of more than 246 articles and theauthor and editor of 32 books. His most recent book is Information
Technology and the American Growth Resurgence (co-authoring with
Mun S. HO and Kevin STIROH, The MIT Press, 2005). His collected
papers have been published in 10 volumes by The MIT Press (1995 to2001). He received his PhD degree in economics from Harvard in 1959
and his BA in economics from Reed College in Portland, Oregon, in
1955.

productivity in Asia going back to the beginning of theinstitute. Productivity and sources of growth are thecentral focus of RIETI.
RIETI is the most significant think tank in Asia dealing with
The focus of economic growth has shifted to Asia. In

economic issues. For example, it published Productivity in

The Rise of Developing Asia and the New Economic Order,

Asia: Economic Growth and Competitiveness in 2007. Thisa paper I have written with Professor K. M. VU from theinvolved productivity comparisons, mainly comparisonsNational University of Singapore, the relative rankingof sources of economic growth in major Asian countries.

of different countries around the world shows that the

RIETI is also sponsoring therise of Asia is upon us. This is a very auspicious time toconstruction of the Japanconsider these issues on the occasion of the first Asia

Industrial Productivity

KLEMS conference.

Database (JIP).

The Asian Development Bank Institute (ADBI) has played

The Hi-Stat Project at

a very important role in research on Asian economies

Hitotsubashi University

and its sponsorship of the conference is a great stepsimilarly has a long history offor KLEMS-type research around the world. Also, as a

research on economic growth,co-sponsor, the Research Institute of Economy, Tradegoing back to the famousand Industry (RIETI) has a long history of research in

EDWARD ELGAR PUBLISHING, 2007

16

RIETI Highlight 2011 Special Edition

studies of the 1950s of the growth rate of the Japanese

conclusions about the sources of economic growth in any

economy. At that time, Japan was the most rapidly

country.

growing economy in Asia. The period of income doubling
created a template later followed by the Asian tigers

International comparisons involving comparisons within(Korea, Taiwan, Singapore and Hong Kong).

Asia and similar comparisons in other regions were also
impossible because everybody had their own way of

For Developing Asia as well, beginning in India in 1991

doing things. The OECD proposed to meet this challenge

and in China in 1978, economic development was

by formulating a set of standards that could be usedpatterned directly after the Japanese growth strategies

around the world. This set of standards resulted in theof the 1950s, 1960s and early 1970s and the successful

OECD Manual—Measuring Productivity: Measurement of

implementation of this strategy by the Asian tigers.

Aggregate and Industry-Level Productivity Growth, which

Needless to say, growth in Singapore with 5 million

was a committee report.

people involves different issues than in India or China.
Nonetheless, this history helps in understanding the

In the OECD style the report was written by a single

emerging Asian model that informs all the research today.

individual, namely Paul SCHREYER, now the Deputy Directorof the Statistical Directorate of the OECD. Schreyer took

The relationship between World KLEMS and Asia KLEMS

upon himself in 2001 the task of writing up the consensus

also has a very long history. I think it is fair to say thatof the Statistical Committee. What emerged is a new set ofthe basic methodology was crystalized in Information

standards for measuring productivity.

Technology and the American Growth Resurgence, a book
I co-authored with Mun S. HO and Kevin J. STIROH in

What do these standards involve? First and most

2005. This book was a result of work done on the impact

important, they involved a view of capital that treatedof information technology (IT) on U.S. economic growth

capital in terms of a service flow instead of a stock. In

during the 1990s and early 2000s. Our book laid out aother words, they formulated standards for measuring

detailed methodology that has become a roadmap for

capital that said that it is not enough to find out what thesubsequent research in this area.

stocks of capital are—which was then the prevailing view

OECD report on standards formeasuring productivity

up to that point—but that it is important to convert thosestocks into a flow of services.

The first of the challenges I will identify is to assemble theThis is an important issue because the service flow fromdata on economic growth. Especially in Japan, but also ina given capital stock differs enormously among different

Korea and the other Asian tigers—there has been a longtypes of assets, in particular between information

tradition of research on sources of growth in Asia. Aroundtechnology (IT) assets and other types of assets. The

2000 this work took a critical turn toward international

elements that make up the service flow are 1) the ratecomparability that is central to the focus of the Worldof return, which is uniform across the different assets; 2)

KLEMS Project.

depreciation, which differs enormously from one type of
asset to another; and finally 3) the decline in the price of

In 2000 the Organisation for Economic Co-operation andassets, or the negative of the rate of increase of the priceDevelopment (OECD), which involves amongst othersof assets. These three elements make up the components

the United States, Japan and Korea, convened a group ofof the service flow. Although the idea had been present

distinguished economists and statisticians to formulate

in economics going back into the 19th century history ofa set of standards for productivity measurement aroundcapital theory, this concrete approach of capital services

the world. This was an era of "many flowers bloom" andwas featured in the publication by the OECD committee

there were many different ways of measuring productivity

and Paul Schreyer's manual.

and thus no basic standard approach that led to firm

RIETI Highlight 2011 Special Edition

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RIETI Policy Symposium

The year 2001 was already very late in the history ofAt the aggregate level, the sources of economic growth

productivity measurement which had been very well

were capital and labor; but at the industry level, industries

developed much earlier in the 1950s and 1960s. However,

have inputs beyond the primary factors of production.

the OECD report was a real watershed in defining the role

In particular, they have inputs of energy, materials andof capital and made it possible to begin to focus sources

services as examples. Furthermore, for most industries,

of growth research on the impact of capital accumulationthese inputs of intermediate goods like sources of energy,

and how exactly that affects economic growth. This had

materials and services are dominant at the level ofbeen vague and imprecise until the OECD took a standparticular industry groups.

about how capital impacts economic growth.
The OECD said that the best way to proceed is to think of
So the history of the subject started anew in 2001 andthese intermediate inputs in addition to capital and laborthat led to the challenge then to implement these ideas

as part of the system of inter-industry accounts. Thisfor many countries. This challenge was taken up in themade it possible to draw on decades of research around

United States, Japan, Korea and people in Europe involved

the world in Japan, Korea, Taiwan, Canada, the United

later in the European Union's EU KLEMS Project, and theStates, Australia, and in many European countries goingOECD then began to organize meetings to deliberateback to 1947 or even earlier. The results from this research

about these issues of capital measurement, but at a very

work could be used by the OECD, provided that input-

fundamental level.

output data could be assembled in a form of consistent

Research on economic growth atindustry leveltime series in both current and constant prices.
Why consistent time series? It is necessary in order toWhat were the other elements in the OECD report? Theselook at the growth of the intermediate inputs to haveincluded the importance of having consistency between

the same kind of consistent time series in current andmeasurement of productivity and the sources of growthconstant prices that would be used at the aggregate

at the industry level and at the aggregate level. Many oflevel to measure capital and labor services. While it was athe consequences of research on economic growth areradical idea at the time, researchers had already devoted

focused on issues at the aggregate level, for example thea good deal of attention to it and it became one of theissue of the role of capital formation. That is something

central themes in the development of the JIP Database inthat starts from the top down, looking at the overall

Japan, and subsequently in Korea and work in Taiwan.

growth of the economy, the role of capital, the role oflabor, the involvement of quality and so on, and all these

Fortunately, the OECD was able to agree that there should

things are then formulated at the aggregate level.

be a framework that incorporated the intermediate goods.
This put extremely difficult demands on the government

However, most of the detail about the sources of growth

statisticians, because they were used to assemblinghas a very specific industry dimension; for example,

input-output tables and liked to have as much detail as

the dimension related to the production and use of

possible, but were not used to the idea of making theseinformation technology equipment and software. Thattables consistent over time. Therefore, the OECD posed a

is obviously something that is very specific to a grouphuge challenge to countries that were already developingof industries. Thus, the OECD took upon itself the task

input-output tables to translate those into a form thatof reconciling aggregate productivity measurements

could be used in the sources of economic growth analysis

f o c u s e d o n br o a d policy issues with industry-levelat the industry level.

productivity measurement that would be consistent andcould be integrated into an overall aggregate picture.

Labor input quality measurement
The third accomplishment of the 2001 effort was theidea of incorporating quality dimensions into the18

RIETI Highlight 2011 Special Editionmeasurement of labor input. The great tradition ofInternational standards for measurement are very wellresearch in productivity analysis is based on the idea

established in the international statistical community. Forof measuring employment or hours worked, and thismany years going back to the middle of the last century,

initiative of incorporating quality dimensions into a labor

the OECD and other international organizations like theinput played a very important role in labor economics

International Monetary Fund (IMF), World Bank and thewhere there was a whole human capital school that

Statistical Office of the European Commission (Eurostat)developed in understanding relative rewards in different

have been working to develop a System of Nationalkinds of labor.

Accounts (SNA) which is standard around the world.
Although this has not focused on issues having to do with

However, the human capital school of research on laborproductivity measurement, it illustrates the idea that the

input never got to the point of thinking about labor input

international community of statisticians is familiar withalong with capital and intermediate goods as input in thethe idea of standardization so as to adapt methods andproduction. Thus, the OECD took the step of saying thatconcepts to the local situation.

labor had to be thought of as very heterogeneous andthat therefore it is necessary to aggregate over different

Measurements are not identical in different countries,

kinds of labor and to reflect in weights of the aggregation

as I learned in research comparing Japan and theprocess the relative quality.

United States. It is necessary to drill down and deal withthe peculiarities of each of these relatively advanced

How should this quality be measured? This is where theeconomies. This holds much more forcefully whenhuman capital school had a great deal to contribute

thinking about moving from industrialized economies

because in the famous Mincer equation, formulated bywith well developed statistical systems to emerging

Jacob Mincer, the focus of the model was on the reward

economies. That is why the role of international standards

to human capital as measured by labor compensation,

comes to play a very significant role in this whole area.

which includes the wages earned, supplements paid in
the form of pension, health benefits, etc., and for many

Revision of the SNA

emerging economies, the rewards to labor that are

After the OECD effort was completed, an effort wasearned as part of self-employment and informal activities.

launched to revise the SNA. This was of great interest

In the developments that followed where the technology

to the statistical community but did not receive any

began to be transferred toward emerging economies, theheadlines in the Wall Street Journal, Nikkei or Financial

issue of essentially using these concepts of human capital

Times. It was nonetheless a very important event because

for informal activities immediately came to the fore, andthe SNA involving the United Nations, World Bank, IMF

that was part of the OECD program.

includes not only advanced industrialized economies
like the OECD economies but all of the economies ofThus, capital, labor, energy, materials and services

the world, down to the smallest island nations. The(KLEMS) were all formulated explicitly as part of an

UN assembled more than a hundred countries in aninternational consensus among economic statisticians

effort to work out a new set of standards that would bein a committee convened by the OECD resulting in aappropriate for the new environment in the new century.

report that established a handbook for carrying out

This effort lasted for perhaps a decade and a momentous

productivity research. This handbook embodied ideas

development took place in a very unusual location. That

that were already present in earlier work and databases

location was Canberra, the capital of Australia.

around the world, but by establishing a set of common
standards, the OECD challenged each of the research

What does Canberra have to do with this? A number

groups that had already been active in this area to bringof committees were appointed by the SNA to consider

their own measurement standards into conformity withissues related to the revision of the SNA and these were

the international standards.

named after the cities where they were convened. Hence,

RIETI Highlight 2011 Special Edition

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RIETI Policy Symposium

a committee was convened in Canberra consisting ofAs the process was finalized, the OECD and the otherabout 150 people and most of the meetings were held inorganizations that developed the SNA produced a two-

Canberra with the purpose of deliberating about issues

volume document called the 2008 SNA, the 2008 revision

having to do with the measurement of capital.

of the System of National Accounts. In chapter 20 ofvolume 2, there was a complete description of how to

Many days, weeks, months and years later, the Canberra

measure capital within the framework of the SNA. In 1993,

Group emerged with its recommendations. These were

only 15 years earlier, a similar UN panel had said that it

to measure capital in a way that can be integrated with

was impossible to measure capital at all and therefore

accounts for the sources of economic growth and to makeprogress in understanding the sources of economic

this an integral part of the SNA. The OECD had alreadygrowth during the most dynamic period of economic

established standards, so if anybody wanted to find out

growth in world history was halted for 15 years as a result

how to measure productivity in an OECD country, theyof a set of decisions by a group of economic statisticians.

could refer to the OECD Manual published in 2001. By
moving this to an agenda involving the standardization ofThis illustrates the great power held by the statisticians

methods and measurement practices around the world,in halting the flow of information that would have been

the United Nations encompassed all of the issues thatessential to understanding world developments at sucharose in dealing with the emerging economies. This wasa critical time. The Asian crisis passed, the recovery

very ambitious.

occurred, and the economic and financial crisis went
forward, all in total ignorance of the role of capital

How could this be accomplished? First, this had to be

in a form that could be compared across countries.

sold to the management. The way the SNA is organized

Fortunately, the authors of the 2008 SNA took this as ais that there are various city groups that report to achallenge and resolved the issue in favor of the OECDcentral commission that passes (or fails to pass) particularmethodology.

recommendations. In March 2007, the United Nations
Statistical Commission, the governing body for the

The OECD followed up by writing another handbook on

revision of the SNA, endorsed the report of the Canberra

the measurement of capital, spelling out exactly how

Group, saying that it was possible to standardize forthis is to be done: how capital services are defined, howevery country in the world the measurement of capital

it is related to capital stock, the role of the deflators,

according to the OECD methodology as part of a world

the role of depreciation, the role of the rate of return,data system, the SNA.

and so on. And all of this was summarized in chapter 20of volume 2 of the SNA, an official document involving

This did not hit the headlines either. It escaped thethe endorsement of the UN Statistical Commission andattention of the financial press, but it was a momentous

literally more than a hundred nations around the world.

development, because it meant that the same standards
could be applied to India, Myanmar, Japan and the United

World KLEMS ConsortiumStates as well as every country around the world. And

This sets the stage for World KLEMS. So what is World

these standards were precisely the ones that had been

KLEMS about? What is the purpose of World KLEMS? The

agreed upon earlier by the OECD which represented

purpose is nothing more or less than to try to implement

a completely different constituency. The people whothese ideas, not only in advanced countri e s i n t h ewere deliberating about this were not ignorant of theOECD, but around the world including the emerging

fact that for many countries this would be an extremely

economies of Asia. On August 19-20, 2010, one year

demanding undertaking, which is precisely why this isafter the publication of the 2008 revision of the SNA, asuch a significant development.

meeting took place at Harvard University to form a WorldKLEMS Consortium to implement the OECD approach forcountries around the world.

20

RIETI Highlight 2011 Special Edition

represented. In addition to the members of the OECD

Application of the KLEMS-type
methodology

which had been involved in the earlier research, there

The idea was to turn this into a practical reality—towere representatives from India, China, Latin Americatake a set of abstract ideas with a set of methodological(including Chile, Brazil, Argentina and Mexico), Turkey,

dicta and implement it at the operating level where

Taiwan and Indonesia, among altogether 40 countries

an economic statistician has to produce a report every

making up more than 90% of world gross domestic

month, quarter or year. It would obviously require an

product (GDP).

enormous research effort to adapt these ideas to the

At the First World KLEMS Conference 40 countries wereconditions, for example, in China or India. Both of theseIt should be noted that the representatives at thiscountries are very promising alternatives because they aremeeting included not only advanced economies with wellamong the economies with the best developed statisticaldeveloped statistical systems but emerging economies.

systems. Therefore, although they are not ideally adapted

The World KLEMS Consortium took on the challenge ofto the application of the KLEMS-type methodology, they

developing methods for compiling and analyzing datacontain all of the elements.

in a form that could be used to understand the sourcesof economic growth in countries at every level around

What are these elements? They are capital, labor andthe world. The Consortium focused on those that are theintermediate goods in the form of input-output tables.

most significant economically, but ultimately with the

Input-output research is very well established in China.

goal to encompass the world economy in as much detail

It is something that goes back to the era of a planned

as possible.

economy and has developed since then throughthe earnest efforts of many research scholars to be

The World KLEMS Consortium was put forward as animplemented within the framework of the Chinese systemapproach to implementing the ideas that had been firstof national accounts. There are official input-output

developed in the OECD report, then endorsed by thetables which can be compared over time and form the

UN SNA and finally incorporated in the 2008 revision ofbasis for a KLEMS-type dataset.

the SNA. The OECD capital measurement manual wasa very important document as well. All of these efforts

The situation is even better in India, which has a long

succeeded in establishing a common methodology andtradition of empirical research in economics with one of

a common set of standards that could be applied in thethe best developed systems of national accounts in thesame way as national accounting had been applied in aworld, a very elaborate system of population statistics,

standard format around the world 40-50 years earlier.

as well as household and economic survey statistics.
Although this effort is quite ambitious to begin with, itThis was the setting for the formation of the World KLEMS

is in fact feasible. However, it takes talent and it takes

Consortium, which greatly broadens the community

the kind of people, for example, who have assembled toof people who are involved. It is no longer a matter oflaunch the Asia KLEMS Project.

simply compiling or collecting the data. Data can becollected on the population, economic units or informal

Role of statisticians

sector, but there may not be an accounting system in

To take these ideas of the World KLEMS that have beenplace. To find out what is needed is a matter of researchendorsed by the international statistical community andin which economic statisticians must collaborate withturn them into reality and economic research that will

people who specialize in economic measurement withinpush this down to the level of international comparable

the community of research economists.

statistics around the world, it is going to take a modeof organization which is extremely well established. In
the United States, Japan, and all of the countries thatare participating in the Asia KLEMS Project, there are

RIETI Highlight 2011 Special Edition

21

RIETI Policy Symposium

established relationships between economic statisticians
and research economists to integrate and use common

growth in the most important countries of Asia.

standards to adapt these abstract ideas having theirAsia KLEMS conference

origins in economic measurement to the specificThat sets the stage then for today's meeting, mainly

conditions that are confronted by countries at every level

beginning to think of how all this can be done in Asia.

of development.

Why is that important? First, economic growth and thefocus of growth in the world economy is shifting very

To meet this challenge of compiling data, it is necessary

rapidly to Asia where all the action is taking place andto involve academic researchers and researchers of think

where the understanding is necessary for issues relatedtanks along with economic statisticians. These are theto the world economy. Second, Asia is a marvelous

people who collect, compile and report the data. The

laboratory for understanding the importance of thesejob will not be finished until the research community

measurement issues and how to resolve them in different

has completed the task of providing something that cansettings.

be reported on a regular basis as part of the national
accounts.

Japan is the country with the most sophisticated highly
decentralized economic statistical system in the world;

The setting is as follows: In 1993, the UN said that it

Korea has an extremely sophisticated system of economic

was impossible to report measures of capital as partmeasurement to which enormous resources have beenof the national accounts. In 2007, thanks to the work

devoted over decades. Paired with these countries and theof the Canberra Group and the OECD, the UN changed

other Four Tigers, the greatest challenges for economic

completely and took the opposite point of view that it ismeasurement emerge. These include the challenge ofpossible in fact to do productivity measurement using theunderstanding economic growth in China and in India.

KLEMS model within the SNA. This is important because

This is not going to be an easy challenge to meet.

it is not mainly a story about research; it is mainly astory about measurement, and measurements must be

Reading the literature on the sources of growth in China

reported on a regular basis.

and India, two countries which are so central to the futureof the world economy, the same enormous heterogeneity

And if data are reported on a regular basis, the standards

and differences in methodologies and approaches thatmust be the same. If the results are going to be

have characterized productivity research around theunderstood by anybody outside the country making theworld until the OECD manifesto of 2001 are seen. With

report, they must conform to the international standards

that heterogeneity, of course, it is impossible to drawof the SNA. Never was there a better time to undertake aconclusions, either for an individual country, for the

project like the World KLEMS Consortium as ambitious asregion or for specific groupings of countries.

it sounds, involving 40 countries around the world, thanWithout standardization, it is impossible to donow.

measurement. That is the situation that economics finds
Fortunately, at the World KLEMS meeting that took place

itself in today. The same applies to measurements inin August 2010, the participants grasped the opportunity

physics or engineering. With the opportunity created

and took upon themselves the role of seeing to it thatby the careful thought of the economic statisticians andthere would be a thoroughgoing implementation of thesebeing implemented in the World KLEMS Consortium, itvery basic ideas in economic measurement that would

really is an opportunity for transformation in economics

make it possible to begin to understand the momentous

in a very fundamental way.

changes that are taking place as a result of growth in theworld economy and growth in the Asian region, which is

The mode of organization is very clear. It is going to be

becoming central to growth in the world economy andnecessary to have the statistical agencies collaborate

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RIETI Highlight 2011 Special Edition

with the research community in each individual

and non-scientific research and development. All of thesecountry; that is, the people who have been studying

things were to be developed in Europe at a state thatthe measurement issues at the ground level where allwould make Europe comparable and surpass the United

the specifics and challenges emerge. Another challengeStates.

is to identify the informal sector which is essentially"the rest" or the economy that is not captured by

At the World KLEMS Consortium meeting in 2010, it wasconventional measurement methods. This does not mean

possible to look backward and see what happened. By

that statisticians in China or India or other emerging

around 2005, five years after the famous Lisbon Agenda,

economies have not attempted to deal with the issues,

Europeans began to develop doubts about things not

but it does mean that this involves a completely separate

having changed five years into it. The U.S. economy wasset of challenges that must be met as part of this overall

growing faster than ever and Europe was languishing.

undertaking. This is an additional reason why thisWhat happened to the goal of becoming the world's mostmeeting on Asia KLEMS is so significant.

dynamic knowledge-based economy?

Role of the regional organizations

A series of reports began to emerge from various sources

That essentially sets the stage for discussing future workand people in Brussels at the European Union began

and the role of the regional organizations that are now

to realize that they did not know the reasons for the

emerging as part of the World KLEMS Consortium, which

slowdown in Europe and the acceleration of economic

itself is very recent, dating back only to 2010. It should

growth in the United States. They received a quick lesson

be noted that the second World KLEMS conference willfrom colleagues at the OECD and the prescription was

be held at Harvard University on August 9-10, 2012.

very simple: It is necessary to carry out a KLEMS-type

Discussion will cover the regional organizations in Asia,

project for Europe in order to understand the differences.

the corresponding organization in Latin America, and

It is necessary to understand where the growth comesmost importantly the organization in Europe, which hasfrom before you talk about a knowledge-based economy.

led the way to implementation within Europe.

EU KLEMS project

In terms of the role of the specific regional organizations,Thus, beginning in 2005, the Europeans began theafter my book with Ho and Stiroh on the U.S. growth

implementation of KLEMS for as many European

resurgence was published in 2005, a group of European

economies as possible. While one might think that thiseconomists led by Bart van Ark and others decided

is easy when dealing with advanced economies such asthat the next step was to try to implement these ideas

United Kingdom, Germany, France and Italy and so on,

for Europe. The European economy had been carefully

there are a lot of economies in Europe that are not so

scrutinized in an international conference of all theadvanced such as the new Central and Eastern European

members of the European Union in Lisbon, Portugal, inmembers, countries that had had no contact with the2000. In the Lisbon Agenda, the Europeans formulated

international statistical community until the fall of

the objective that Europe should by 2010 become thethe Berlin Wall in 1989. These countries were in a very

world's most dynamic knowledge-based economy.

primitive state, statistically speaking.

This goal was originally set in 2000, at a time when the

Nonetheless, 25 EU economies were eventually included

U.S. economy had grown at faster rates than ever before

in this project which resulted in an initial release on 15

for about 10 years and the European economies flowed

March 2007. This was the first and most successful project

relative to their very dramatic growth of the postwar

so far implementing the KLEMS approach designed

period. They were very specific about what that meant, i.e.

by the OECD across a very heterogeneous group of

the use of information technology and knowledge-based

countries in different stages of development, statisticalmethods for developing technology such as scientificsophistication and research sophistication. Still, this initial

RIETI Highlight 2011 Special Edition

23

RIETI Policy Symposium

release provoked not a storm of controversy but rather acountries. This is the fundamental concept of purchasing

welcoming on the part of statisticians and measurement

power parity (PPP).

economists, not only in Europe but around the world.
When one begins to compare sources of growth acrossEven people who were skeptical about the KLEMS

countries, or outputs across countries, it is necessary toapproach stated that this was a new era and something

make use of the concept of PPP, a common set of pricesthat will be the definitive treatment of the Europeanthat enable the translation of results from different

economy for the decades to come. The European

countries into results from other countries. This is worked

countries continued to cooperate and by the middle ofout in some detail for the United States and Japan and in

2008, just before the financial crisis, the EU KLEMS Projecta lot of detail for the EU economies and is an integral partwas completed. This project was reported in a bookof the design of Asia KLEMS. The conclusion then is thatedited by Marcel Timmer and his colleagues, which wasthere are standards in place and an accumulated well of

the first international comparison among such a broad

experience now in implementing an approach to KLEMS

range of economies involving 25 of the 27 EU members.

that makes it possible to standardize measurements
across countries, and most importantly to do inter-

As Professor Pyo remarked, as part of the EU KLEMS Project, thecountry comparisons.

community of people already involved in this type of researchin the United States, Canada, Japan and Korea were invitedThis leads to the third and final capstone of this research,

to join as "adjunct members" of the EU KLEMS Project with annamely the world input-output database. The idea isidea that if the EU KLEMS Project was successful, it could leadthat in addition to making comparisons across countries,

to a broader effort involving other countries. By the time theit is going to be possible to look at the way in which

project was completed, this approach was well known among

these countries are integrated through international

people in the measurement community not only in Europe,

trade. This will essentially unify the world statisticalbut in the United States, Canada, Japan and Korea and all

system and provide a unified picture of the worldof these separate efforts began to focus on the same

economy involving not only the individual countries andbasic methodological approach, mainly implementing

comparisons across countries, but the very importantthe standards agreed upon by the OECD statisticians andprocesses of international coordination that are involved

finally implemented in the SNA. The book describing thein international trade. This is obviously a very ambitious

EU KLEMS Project was published in 2010 and volume 2

undertaking and has implications for Asia KLEMS.

has gone to press with contributions from members of
the EU community who did individual country studies

Asia KLEMS and the challenge ahead

with a full report of a successful implementation of an

Asia KLEMS is a project that was launched at the initiativeinternational comparison project involving KLEMS-typeof Professor Pyo who was fortunate to enlist RIETI andresearch.

ADBI in co-sponsoring this effort with support from

PPP and World I-O database

Hitotsubashi University based on the basic idea that the
EU KLEMS model involving integration of comparison of

Exactly what was accomplished with the EU KLEMS

methods across countries adapted to specific situations

Project? It was not merely a comparison of growth of the

could be extended to Asia. The motivation is easily

25 countries. The ambition was much greater. The people

understood. Asia is where the action is. Research inwho designed the EU KLEMS Project had in mind noteconomic growth has to be done on Asia and it is an

merely the idea to compare growth rates across countries,

area which has already been carefully "prospected" byb u t a l s o l e v e l s . I t was necessary to have me asuresinvestigators in Japan, Korea and Taiwan in earlier work

comparing, for example, the level of capital in Italy within productivity. What has been missing so far is the use

the level of capital in France, etc. Therefore, an effort wasof common standards. Fortunately, because of the work

made to integrate the measurements for the differentof the UN, the OECD and of the EU KLEMS Project, these

24

RIETI Highlight 2011 Special Editioncommon standards are in place.

The challenge here in Asia is completely different,
namely precisely the reverse. As Asia is the center ofWhat remains to be done? It is necessary to understandgravity with world economic growth moving to Asia,

how these standards can be applied to the conditions in

the prospect is not only that China will overtake Japan,

Asia. This reveals problems of a totally different order andwhich happened last year in terms of exchange rates, but

totally different set of challenges than have been seen

it will also overtake the United States by around 2018 as

before. How is it going to be possible to apply these ideas

the world's largest economy. The United States has beenthat have been mainly developed and implemented forthe world's largest economy for a hundred years, so thisadvanced economies to a region like Asia where there

is a historic development, but is not limited to China.

are indeed advanced economies—as advanced as any

India will overtake Japan. This should not be shocking. It

in the world—along with very large and very importantis something that is going to happen and it will happen

economies that are emerging, that have statisticalwithin the next decade.

systems still under development, but are the core of theemerging pattern of economic growth in the world. How

Developing Asia, excluding Japan, will overtake theis that going to be possible?

famous G-7, the industrialized countries that have led
the world since the middle of the last century. This

Professor Pyo has succeeded in enlisting an outstanding

will also happen within the next decade. There will begroup of collaborators from Japan, India, China,

a new world order emerging as this research for Asia

Singapore, Malaysia and so on. This is something thatKLEMS is undertaken. Therefore, rather than looking at

is now beginning to take real form, where confidence

a divergence in which deficiencies in the EU countries

is building that the approach that has already been

are now becoming increasingly apparent, the project

tested so thoroughly over the last decade since thewill look at the emergence of the "Asian century," and it

beginning of the new era of productivity measurement

is something that economists around the world will be

can be successfully applied in Asia. Difficult issues will

required to study.

certainly emerge, but groups are already forming thatare going to solve these problems. Very well established

There will be many voices that will be part of this debategroups already exist in China and in India, with additional

over the rise of Asia. Goldman Sachs and all investment

projects being launched in Asia that are going to make itbankers have their own view on this topic. What role ispossible to meet these challenges.

there for statisticians and economists in this debate? The
numbers that the people are going to be referring to as

Asia KLEMS will have an independent identity from World

this debate unfolds are the numbers produced by thisKLEMS. The problems that are going to emerge are not goinggroup. The same is going to be true around the world as

to be solved by any kind of top-down dictation of standards

part of the World KLEMS Consortium.

and so on from any kind of international organization. Those
are already in place and agreed upon, but the implementation

The first Asia KLEMS meeting has something to contributeis something that has to be done on the ground. That is thethat is unique. The researchers assembled have thepurpose of the Asia KLEMS conference.

knowledge, standards and the experience that will
make it possible for people in the economic statistical

This is an extremely challenging undertaking and iscommunity who are reporting the growth rates to extend

something that has an audience waiting for it. It is not thetheir reach and build up a new model for measurementkind of audience that was waiting for the result of the EUof economic growth. This will lead to an understanding

KLEMS Project. In that case, it was a story about a failure;of the sources of economic growth that will apply to Asia

a failure of Europe to keep up with the development

and around the world as this Asian century unfolds.

of technology which then looked so impressive in the
United States. That was the challenge there.

RIETI Highlight 2011 Special Edition

25

RIETI-RAND Symposium

What Have We Learned fromthe Panel Data of the Elderly?
For better life and healthJuly 29, 2011
Solving issues related to the economics and health of the elderly is one of the top priorities facing Japanat present. Due to increasingly tight fiscal conditions, however, discussions tend to focus only the financial
aspect. One of the reasons we do not see more fruitful discussions is the lack of statistical data reflecting
actual conditions of the elderly in Japan from a multidimensional perspective. Industrialized countries
have conducted large-scale panel data surveys and utilized the resulting data as a valuable input for
real-world policymaking. In Japan, a comprehensive survey of elderly people based on an international
standard—Japanese Study of Aging and Retirement (JSTAR)—was launched in 2007 by RIETI and co-working
institutions. The symposium "What Have We Learned from the Panel Data of the Elderly? For better life andhealth" held on July 29, 2011 brought out the true picture of the elderly captured in these datasets and how
they are utilized in actual policymaking by the world's leading researchers conducting these surveys. Also,
the nature of JSTAR results as well as its policy implications were presented. The symposium proved us theimportance of panel studies.
Lecture"Longitudinal Aging Data for
Behavioral and Social Research"
John W.R. PHILLIPS

receiving expert advice on the direction of its scientificprograms. The decision to go ahead with the Healthand Retirement Study (HRS) was similarly made throughrecommendations at numerous workshops and expert panels,
such as the 1987 Ad Hoc Advisory Panel on Data Collection

Behavioral and Social Research Program, National Institute on Aging(NIA)

Priorities, as well as regular reviews. The consistent themes

The mission of the National

having longitudinal, multidisciplinary data and consideration

Institute on Aging (NIA) is tofor biomarkers and administrative linkages, among others.

that came out of all of the workshops were the importance ofimprove the health and wellbeing of older Americans by

The NIA promotes and develops data by making use of

conducting high-quality researchmechanisms that feature interaction between the federal(aging processes, age-related

government, the data collectors, and third-party experts,

disease, and special problems

reaching across to other federal agencies for administrativeand needs of the aged) anddata linkages as well as finances. It has also started initiatives

disseminating information to interested groups so that theto ensure that the data is well used and harmonized throughdata can be useful for a wide array of key policy questions

research networks and distribution mechanisms. Throughout(social security, Medicare, etc.). The NIA Strategic Plan of

the grant process of the NIA, there is continuous review and2007 also supports the development of longitudinal studies,monitoring by third-party experts for the development of thedata archiving and data sharing as well as the development

HRS. The partnerships made with other federal agencies, suchof internationally harmonized social and behavioral data onas the U.S. Social Security Administration and the Center foraging to foster cross-national research.

Medicare and Medicaid Services, have provided opportunities
for doing unique research with administrative data.

The research model followed by the NIA is to gather
considerable input from the research community, thus

26

RIETI Highlight 2011 Special EditionBased upon the successes in cross-national research (e.g.

potential to break down samples by individual geography,

Gruber/Wise), greater comparability of the different aging

although it has not been a major focus. Relating JSTAR tosurveys for the purpose of generating more cross-national

HRS, Dr. Phillips commended JSTAR and predicted that JSTAR

research is encouraged. Planning grants are offered forwould grow and develop even more rich data.

international data collection and to help create more
harmonized measures and develop the studies. RAND,
through support from NIA, has two programs that work toeffectively distribute the HRS data: the easy-to-use RAND
HRS dataset and the RAND Survey Meta Data Repository as

Session 1

Population Aging in the World
Observed in Panel Dataa resource for cross-national research. Both are free to the
public online.
In sum, the HRS was a result of the NIA soliciting a longitudinal
aging study with significant feedback from the researchcommunity. The distribution strategy has been successful inincreasing the number of scholarly users. It has also been asignificant contributor to science and policy, covering many

"Outline and Purpose of the Japanese Studyof Aging and Retirement (JSTAR) and the True
Picture of Elderly People in Japan as Revealed by
the Study"
ICHIMURA Hidehiko

Faculty Fellow, RIETI / Professor of Economics at the Graduate Schoolof Economics and the Graduate School of Public Policy, The Universityof Tokyo

topical areas across several disciplines. For example, theFor many developed and

HRS informed studies on the expanded Medicare Program

developing countries alike, theon prescription drug benefits, the impact of the financial

increasing aging population

crisis on stocks and retirement, and the impacts on cognitiveis a common issue. Japan isfunctioning after severe sepsis. The HRS is used not only

unfortunately the leader inin academics but also extensively throughout the federal

this respect, with an old age

government for policymaking. In this sense, the HRS is a publicdependency ratio of 35% andgood for conducting innovative multidisciplinary research.

expected to rise steadily. The main

Scientific Productivity of HRS
1800
1700
1600
1500
1400
1300
1200
1100
1000
900
800
700
600
500
400
300
200
100
0

concern of such a high dependency ratio is the shortage oflabor supply and deterioration of the balance on the pay-asyou-go pension system. This has led to the elderly remaining

Cumulative Count as of 11/22/2010
968
Journal Publications
Books and Book Chapters 138
208
Dissertations
457
Working Papers
Total
1771

in the labor market longer, and this experience in Japan may
contribute some knowledge for other countries.
Concrete numbers show, for example, that for elderly men,while the proportion has decreased compared to 1980,
Labor force participation by age (Male) G7+ in 2007
%

100
90
80
70
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

CanadaFranceGermany
Italy
USA
UK(’08)Finland(’08)
Sweden
Japan

60
50

15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–

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contribute to local governments, he explained that there is

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intergenerational transfer. Regarding how the HRS data can

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which has looked at issues of late life work, retirement,

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Q&A Dr. Phillips mentioned the Economics of Aging project

Age

27

RIETI-RAND Symposium%

Labor force participation by age (Female) G7+ in 2007

JSTAR is largely based on the Survey of Health, Ageing

100

and Retirement in Europe (SHARE) as is common acrossCanada(’81)
France(’82)
Germany
Italy
USA
UK
FinlandSweden(’82)
Japan

90
80
70
60
50
40

HRS-related surveys and has eight sections (individual
characteristics and family; cognitive ability; work; health;
income and consumption; grip strength; housing and assets;
and medical treatment and care service usage). It differsfrom other studies in that it is not a nationally representative

30

stratified random sample. In addition, JSTAR measures food20

intake using a questionnaire validated in Japan. For those who

10

gave permission, it is possible to link the data to administrative
records of their health and nursing care usage, as well as their

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15–19 20–24 25–29 30–34 35–39 40–44 45–49 50–54 55–59 60–64 65–69 70–74 75–

AgeJapan's numbers are still higher than other G7 countries. For

medical examinations. It would be of benefit if the government
allowed links to social security data and tax records.

Japanese women (over 60) also, many remain in the labor
force longer than in the G7 countries, but not Sweden. There

While some argue that people, if left on their own, would not

is a trend across cohorts that men's labor force participationsave enough for old age, Scholz, Seshadri and Khitatrakun

is declining, but for women this is increasing, and it is driving

showed in 2006 based on the HRS that people are over-saving

the age issue. In order to consider pension, employment,

rather than under-saving. Following this, calculating expected

health and nursing care policies, comprehensive data

net lifetime wealth by cohort using income/expenditure,collection efforts that commenced in the U.S. wereconsumption and health information collected throughpropagated across the world. JSTAR is a recent addition to thisJSTAR reveals that the ratio of people with a below averagefamily and harmonization efforts are now being led by RAND

expected net lifetime wealth decreases with age (50 andfor cross-country comparisons to be made. There are panelover). Without such insights, it is simply impossible to design

studies all around the world, including in the U.S., Indonesia,

a sensible pension system or more generally a sensible social

Mexico, Europe, Korea, Japan, China, Ireland, Thailand, India

security system. For this, HRS type panel data provide the key.

and Brazil.

security reform, JSTAR hopes to play that role in Japan. The"A Comparative Study of Well-being in the U.S.,
the UK, and Continental Europe"

first wave in 2007 was based on a stratified random sample

Arie KAPTEYN

As in the U.S. where the HRS informs policy debates on social

of five municipalities; the second wave in 2009 added

Director, RAND Labor and Population

two new locations; and the third wave in 2011 plans to

The motivation behind thisadd three more locations. This sampling design based oncomparative study is the aim ofmunicipalities has the advantage of having many individuals

government policy to improvewith a uniform socioeconomic environment, namely athe well-being of its citizens andcity. Many of the questions relate to how individuals makethe obvious positive correlation

decisions given the environment and how the environment

between well-being and health.

affects individual decisions. The sampling allows for a more

The objective is to determine

flexible separating of the effect of the environment and thethe differences across countries

differences across individuals such as income level, education,and people. By using several items from the Center foretc. On the other hand, a disadvantage is that a nationally

Epidemiologic Studies Depression Scale (CES-D) asking

representative sample cannot be constructed easily. The aim

respondents to report unpleasant feelings, a depression scoreis to obtain representativeness by increasing the number ofis determined for individuals. The items chosen are those thatmunicipalities, currently at ten. Another constraint is the lack

would yield comparable data, for example demographics,

of human resources, for which further funding is necessary.

major/minor health conditions, health behavior, limitations

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RIETI Highlight 2011 Special Edition

in activities of daily living (ADLs), limitations in instrumental

that religion or other spiritual practices were not currently

activities, age and birth year.

considered in the descriptive data.

In the results from a multivariate analysis, i.e. keeping other

Professor Ichimura added to his presentation that JSTAR doesthings equal, depression scores from different studies

not include explicit questions on job status (non-regular,

were compared. The HRS shows that in the U.S. depression

contingent), but does include non-paid, voluntary work. He

decreases with age. However, looking at birth year, thosealso explained that the JSTAR sample covers about 0.05% ofborn earlier are more likely to be depressed. Results of thethe population and that it includes Japanese/non-JapaneseEnglish Longitudinal Study of Ageing (ELSA) study in the UK

alike as long as the respondents are registered in theshow the same trend by age and cohort, as do the patterns

municipalities. Furthermore, JSTAR measures social capital by

from SHARE for Continental Europe though the correlations

number of friends in different categories. To a question about

there are slighter. This exercise stresses the fact that effects

gaining permission about respondents' health conditions,of age cohorts have to be taken into account on top of age

Professor Ichimura stated that building rapport is very

when studying depression. Even controlling for the selectivity

important for the interviewer.

effect, i.e. that optimistic people are more likely to live longer,
essentially the effects of changes in depression by age areof depression include ethnic background, smoking, gender,"Health and Early Retirement: Policy lessons frominternational comparisons"work, ADLs and IADLs, marital status and income.

Axel BöRSCH-SUPAN

the same. Other demographics that influence the likelihood

Director, Munich Center for the Economics of Aging (MEA) at the MaxPlanck-Institute for Social Law and Social Policy (MPISOC)

Controlling for these variables, one interesting finding
from the HRS is that the effect on an individual's sense of

In order to compare differences

depression is major for those without health insurance

in the effects of public and social

compared to those with health insurance. Looking at work as

policy on behavior, it is important

relating to retirement, the effects vary across the U.S., the UK

to study cross-national variationand Europe. Since effects are controlled for income, wealth,through econometric analysis

etc., the differences in the importance of work on depressionof survey and macro data. Somemay be based on social factors.

typical insights from cross-nationalcorrelations are the negative

In sum, the similar patterns across countries show that there

incentive effects of pension provisions on early retirement,

is evidence for different roles played by age and cohorts. This

the fallacy of the relationship between early retirement andspeaks for the significance of having panel data. In addition,

unemployment rate, the correlation between per capita

reduced functioning leads to more depression; money andexpenditure devoted to the elderly versus the young, and thebeing married are protective against depression; and females

effect of health care spending on health status.

are more at risk of depression. Questions raised by differencessuch as work being a more important factor in the U.S. or the

To solve the causality issue, panel data and detailed micro-

influence of insurance on dealing with major health shocks

data are necessary because it is not easy to draw conclusions

have to be considered when looking at policies in this field.

from broad macro aggregates which are very often
simultaneously determined. Exogenous forces of policy

Q&A Professor Ichimura asked whether there were studies

effects can only be explored through micro-data and panel

looking at the linkage between depression and suicidal

data as they include data over time and policy events. For

behavior, to which Dr. Kapteyn replied that it could be

example, historical experiments in Germany demonstrate theadded in the JSTAR but that complications could arise inimportance of using panel data to make effects, such as drop

measurement and number of observations. Responding

in retirement age and effect on unemployment, visible.

to a question from the floor, Dr. Kapteyn also explained

RIETI Highlight 2011 Special Edition

29

RIETI-RAND Symposium

In Europe, SHARE has collected data from 20 European

much is known about the cognition of older Indians.

countries with a sample size of 60,000 households. It is theclosest correspondence to a laboratory setting, measuring all

Research has shown that in developed countries, thethe effects of pension systems and health care systems. SHARE

cognitive functioning of women is generally better than thathas been built up to use cross-national variation amongof men. The evidence from developing countries, thoughhealth, labor market and institutional data. The challenges

much more limited, shows that women perform worse thanin collecting data in different countries include variations inmen, due possibly to educational differences. However, thelanguage, institutions, interpretation and methods. These are

literature on India focuses only on single-city populations

solved by using computer-assisted technologies, objectivewith the female disadvantages more pronounced in themeasures and common reporting styles.

Northern states. This North-South difference may be due tofemale discrimination and gender inequity.

An example of a similar comparative study was done on
the side effects of disability insurance, for which there are

The pilot survey of the Longitudinal Aging Study in India

huge variations in enrollment across Europe. Looking at(LASI) was completed in 2010 covering four states and 1,546

the causes of these variations and relating them to healthrandomly selected households. Indian census data show

and other variables, it is found more probable that thosereal gender imbalances in the North and a difference in life

who are in bad health receive disability benefits within each

expectancy with the regular pattern of women living longer

country. However, there seems to be a very strong effect ofthan men in Southern states, but not in Northern states.

policy between countries in terms of lowering the number

Based on results of cognitive tests, the LASI revealed genderof recipients receiving disability benefits in countries where

differences in episodic memory as well as global cognition

generosity is low. Thus, there is a clear distinction of health aswith women performing worse and a greater gap especiallya driver of disability benefits within each country, but it is thein Northern states.

policy across countries that makes a difference.
The cognitive gender disparities could be explained
In conclusion, international comparisons are powerful inby gender inequality (under-nutrition, education anddetecting policy effects, but they only work when data ishealth care), restricted social engagement and increased

harmonized so as to avoid spurious effects. Obtaining panel

psychological distress. These possible risk factors of cognition

data thus requires resources, funding, foresight, and patience.

were analyzed to see whether the female disadvantage
persists after controlling for them. For example, there is no
female disadvantage in terms of nutrition and food insecurity,"Cognitive Health of Older Indians: Individualand geographic determinants of female
disadvantage"
Jinkook LEE

Senior Economist, RAND Corporation

but a big disadvantage in terms of education and literacy
with a much higher proportion of women with no schoolingin Northern states. A female disadvantage is also observed inself-reported chronic diseases (but not infectious diseases);men are found to be more socially engaged; and women in

The motivation behind studying

Northern India are more depressed than men. Controlling for

India is its size, large population

the risk factors, education and psychological distress wereand huge geographic variation

found to be able to explain the female disadvantage, but notwith each local government

others. Analyzing the covariants, the main effect of female

having different policies. As

differences observed in the Northern states is found not to be

for cognitive function, it has

statistically significant.

been found to be a risk factor ofphysical chronic disease and vice

In conclusion, women aged 45 and older in India do worse inversa. India is experiencing an epidemiological transition withcognitive tests, and more so in Northern states, and education

non-communicable diseases increasing rapidly. However, notaccounts for 40-50% of the gender disparity in cognition. This30

RIETI Highlight 2011 Special Editionimplies that greater access to education among women has ahealth care but has a lower life expectancy. In addition, thegreat potential to reduce gender disparities in cognition.

Dartmouth atlas shows regional variation in spending within
the U.S. However, high-cost medicine in areas does not seem

Q&A Dr. Lee explained that one variable to look at in theto lead to better outcomes than low-cost medicine in otherfuture is the extent of experiencing discrimination in earlyareas. Therefore, the policy prescription being pushed is tochildhood, which may explain the regional differences. She

have expensive regions practice medicine more like the lessalso stated that marital status did not have a protective effectexpensive areas to save money without harm to health.

for cognition and depression in India. Professor Ichimura
added that looking at age and societal change over time may

Looking at the distribution of expenditure for Medicare, while

also be of interest. A participant further suggested adding

there are differences, the effects seem exaggerated, and what

predictive probabilities to compare North-South differences.

needs to be established is whether people persistently spend
more than others in the same health condition. With the HRS
linkages to administrative records, it is thus valuable for policy

Session 2

Considering Medical and Health Care
Policy Based on Panel Data

research. On the question of whether to target interventions
on regional provider or individual spending variation, i.e.
which has greater potential for savings, the answer would haveto come from observing Medicare spending in claims data

"Should Medicare Reform Target Incentives for
Providers or Patients?"

for time periods between HRS interviews and regressing overDavid WEIR

explains more of the residual variance than looking at the

Research Professor, Survey Research Center, University of Michigan /Director, Health and Retirement Study (HRS)

various variables. The findings show that the patient effectregional provider effect. Thus, targeting policies at individuals
would be at least as effective as targeting providers.

The HRS and its international
network have particular relevancefor studying fundamental"Using International Country Data to Learn about
Health—The case of England and the USA"questions about health andJames P. SMITH

to policy and are beneficial

processes of aging given their

Distinguished Chair in Labor Markets and Demographic Studies,
RAND Corporation

coverage of economics andpolicy participation. Aging is the

In the background to thispolicy challenge of the 21st century everywhere as aging

comparison was the motivation

populations create fiscal pressures with commitments toto determine the reasons why inretirees exceeding current taxes from workers. Althoughterms of prevalence of various

comparatively the U.S. is not aging as rapidly, the current

diseases the U.S. leads even theimpasse over raising the debt limit is essentially about aging

UK among those 55-64 years ofand a complete lack of what it means for public policy.

age. Differences in reporting aswell as conventional risk factors

Policies for older Americans include Social Security andwere considered as explanations, but they did not explain

Medicare with the effects on the latter more unpredictable

why Americans had the highest disease prevalence. Neither

and uncontrollable. Medicare's unfunded liability, estimated

did less standard risk factors, such as social integration andat about US$41 trillion, is larger than that for Social Security.

support (behavioral/psychosocial risk factors). However, one

This is why Medicare is the biggest and most difficult aging-significant explanatory risk factor were body shape indicators

related policy in the U.S. To contain spending on Medicare,such as waist circumference, as opposed to body mass index

the best policies would be to limit spending on treatments(BMI) which is regarded as a poor measure of risk of disease.

that provide less benefit, since the U.S. spends more on

RIETI Highlight 2011 Special Edition

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RIETI-RAND Symposium

Another hypothesis was to study childhood disease history.

due to reduced mortality of stroke and heart diseases, andAcross all age groups, Americans were more prone toespecially since the 1980s among those 75 years of age

childhood diseases than the English. For all kinds of adultand older. Furthermore, the top contributors to mortality

illnesses as well, Americans fared worse than the English.

(hypertension, tobacco, inactivity and other lifestyle factors)

Controlling for age, gender and country differences,can be treated in a primary care setting. However, thesemeasuring the interaction of adult and childhood diseases,

findings do not inform policy reform as they lack social orexistence of diseases at very early ages seems to be a

psychological backgrounds to individual behaviors.

significant contributing factor for adult illnesses in the U.S.
Another explanatory factor may be differential screening

OECD health data show that Japan spends only about 8.5%

effects for cancer in the U.S.

of its gross domestic product (GDP) for health, but coverageof public expenditure for health is very high. Also, using

Other uses of data are in mortality and disease incidence.

JSTAR data, it is possible to see that equity in access is highComparing the HRS and ELSA in these terms, it can befor outpatient services, but there is a poor-rich gap for dental

concluded that the U.S. has a higher prevalence and incidence

services. Analyzing out-of-pocket payments proportionate toof disease, but Americans outlive the English. Therefore, despite

household income, those in their 60s are found to spend thethe inefficiencies in the U.S. health care system, the idea thatlargest amounts and even in the lowest income quartiles, this

it is not productive is incorrect since it has a lower mortality

figure is about 8% of income.

rate. However, if control measures, such as standard healthbehavior, marital status and work, are included, the differences

With the government discussing reform plans to increase thein mortality between the two countries diminish greatly.

co-payment rate for the elderly, a precautious assessment

Furthermore, if health status is controlled for, the mortality

on how this affects their access and health care outcomes

gradients by financial status between the two countries

is necessary. In this respect, JSTAR could be a powerfulactually disappear. Also, comparisons over longer periods ofcontributor. For example, studying access to preventive

time generate little evidence of significant wealth effects.

services, such as annual checkups, one can see considerable
variation depending on education and work status as well as
across cities. Linked with claims data over time, expenditures"Health and Heath Care in Japanese Elderly"

for most illnesses have consistently stayed high in Japan.

HASHIMOTO Hideki

JSTAR additionally first introduced a food frequency

Professor, School of Public Health, The University of Tokyo

questionnaire to study dietary patterns, which show, forexample, that age, marital status and region make quite a

Following the end of thedifference on the intake of different types of food.

Second World War, Japaneselife expectancy has grown to

In conclusion, while the longevity trend has so far been good,

exceed that in all countries ofthere are problems in primary care, and lifestyle modification

the Organisation for Economic(quitting smoking and healthy diet) should be enhanced.

Co-operation and Development

In addition, panel comparisons with HRS and SHARE are(OECD), although the longevity

important to find out what makes longevity in Japan so unique.

of Japanese men seems to be
decelerating nowadays. Data to be published in The Lancet

Q&A In response to a question on individual and provider

on the Japanese health care system show that primary careeffects, Dr. Weir explained that the extent to which individualand lifestyle modification still matter and may be the keys toproviders vary even within regions in persistent ways is notstrong population health in Japan.

captured in HRS since the focus has been on regional clusters
of provider behavior. He also added that regional variations

Looking at historical changes, the demographic andepidemiological analysis has detected that prolonged life
expectancy of elderly men and women in Japan is mainly

32

RIETI Highlight 2011 Special Edition

within the U.S. are very localized and may be widening.

Dr. Smith stated that the degree of inequality in the U.S. is notcross-country variation in retirement has been shown to be

the driving force of the difference compared to the UK. He

a consequence of the incentive effects created by public

speculated that one possibility is that preventive treatment ofpension, disability and tax policies, and it is unlikely that thesechildhood illnesses is better in the UK, calling for an analysis

policies have been set in response to observed age patternsof the medical system as a whole.

of cognition in a country's population. Thus, policies provide
valid instruments to remove reverse causation of cognition

On the issue of burdens of an aging population on society

on retirement behavior in micro-data.

or on individuals, Dr. Smith drew the conclusion that theextended period of life was also one of extended quality of

Based on such a research base, that retirement is influenced

life, to which Dr. Weir agreed since most of the burden hasby policies, the Mental Retirement Hypothesis investigates

so far been physical disability. Dr. Weir added that it would

the causal effect of retirement on cognitive status of older

be important to continue watching if there is earlier onset

persons. This involves identification issues which could beof cognitive decline and measuring burden of care among

misleading since retirement is a self-selected status and could

generations and how this is managed between state andlead to reverse causation. Theoretical cognitive psychology

family. With regard to taking into account environmental

states that fluid intelligence, or the "thinking" part of ability,

exposures in regions, Dr. Weir believed that this would be ofdecreases with age, while crystallized intelligence, theinterest in the future.

"knowing" part of ability, increases. The Flynn Effect of large
cohort growth in fluid abilities may be explained by aspectsof human capital theory.

Session 3

Work Participation of the Elderly as
Suggested by Evidence from Panel Data

Thus, the two arguments to be made for the Mental
Retirement Effect could be the Disengagement Lifestyle
Hypothesis, i.e. increased stimulation in the workplace, or"Mental Retirement: National-level policy
variations and pooled cross-sectional data from
HRS, ELSA, and SHARE to identify a causal effect ofearly retirement on cognition"
Robert WILLIS

Professor, University of Michigan

the On-the-Job Hypothesis, i.e. different incentives to invest
human capital. Regressing labor force participation on
cognition, the negative correlation can be illustrated clearly.
From results of models using different variables, it can beconcluded that early retirement has a significant negative
impact on the cognitive ability of people in their early 60s

Despite popular belief that mental exercise can stave off

which is both quantitatively important and causal. These

cognitive decline, empirical evidence for this idea is weakfindings are consistent with research showing that fluid

since the causal direction is unclear. This study uses HRS, ELSA

intelligence is affected by human capital and show that not

and SHARE to investigate the idea

working at an older age reduces cognition. For Americans,that people could avoid cognitive

there has been a reversal of the century-long trend toward

decline at older ages by being

early retirement, which could be good news for the cognitivein a more mentally stimulating

capacity of the aging nation.

home or work environment. A
previous study using these data
correlation across countries"Retirement Process of Elderly People and Social
Security in Japan"

between cognitive ability and retirement illustrated plot of

SHIMIZUTANI Satoshi

found remarkably strong negative

cognitive performance versus labor force participation. This

Consulting Fellow, RIETI / Senior Research Fellow, Institute forInternational Policy Studies (IIPS)

study finds support for the hypothesis that this is a casualeffect using country-level retirement policies as instrumental

As already stated, Japan is showing an unprecedented

variables. The rationale for this approach is that most of the

speed of population aging, longer life expectancies, later

RIETI Highlight 2011 Special Edition

33

RIETI-RAND Symposium

retirement and higher labor force

to track the transitions in employment status (employed toparticipation in old age. In addition

self-employed and full-time to part-time) and declining hours

to these macro observations, it isworked before retirement with the JSTAR data. Regression

also necessary to consider micro

analyses reveal factors affecting probability of working for

observations, in particular on

men and women, such as numbers of hours worked, spousal

the issue of individual decision

separation, and lifetime assets, and for men, cognitive decline.

making in retirement focusing on
policy/institutional effects. In such

In conclusion, JSTAR is a nice opportunity to explore thean analysis, diversity among people and incentive mechanisms

retirement "process" by longitudinal, interdisciplinary andneed to be kept in mind. While the relationship between social

international features. Further examination of the "process"security and labor supply has been intensively studied abroad,by JSTAR is indispensable to policy evaluation and new

data had been scarce in Japan until the emergence of JSTAR.

scientific knowledge.

In studying retirement, three features have to be considered:
1) retirement depends on definition; 2) it may be a gradualprocess; and 3) it may be a joint decision. JSTAR data illustrates
that there is a jump in the 60s in the non-working status, witha higher female non-working population. Furthermore, while
the retirement age is concentrated on age 60, the dominant"Were They Prepared for Retirement? Financial
status at advanced ages in the HRS and AHEAD
cohorts"
David WISEJohn F. Stambaugh Professor of Political Economy, Harvard Kennedy
Schoolexpected age of retirement is at 65. The age at which people
start receiving public pension benefit (National Pension

The level of assets that households

Insurance (NPI) or Employees' Pension Insurance (EPI)) ishold can be used as an ex post

also concentrated on ages 60 or 65. It should be noted thatmeasure of retirement preparation

JSTAR is the only data source to examine a forward-looking(assets in the last year before

claiming decision, which has important policy implications fordeath) as opposed to an ex ante

designing public pension policies.

measure (assets at the beginningof retirement). The study also

Expected retirement age

emphasizes the importance of

4
3

Male

health and family pathways to end of life.

FemaleBalance sheets including the three asset categories of3

Fraction

2

financial assets: home equity, social security, and defined
benefit pensions, suggest that a lot of older single people areliving essentially on annuities. Three different pathways to2

end of life were followed in the AHEAD survey: one-person
1households; persons who started out in 1993 in two-personhouseholds, but their spouse died in the last observed year;

1

and persons in two-person households. In terms of evolutionof assets, people who survived the longest after 1993 had the
90

│

│

80

│

│

70

│

│

60

│

│

50

│

│

0

100 50

60

70

80

0

Preliminary analysis using JSTAR data shows that survival

largest assets in all three family groups. Health status related
highly to the drawdown of assets as well as mortality andfuture health events, among others.

probability and liquidity constraint is significantly related toclaiming behavior. There are also huge discrepancies between

The conclusions that can be drawn from looking at annuity

changes using cross-section or panel data. It is also possible

income, non-annuity assets, and health before death are

ex _ r e t i r e m e n t a g e 0 7 _ e a r l y

34

RIETI Highlight 2011 Special Edition

that a large fraction of retirees rely almost entirely on Social

wealth) would increase life satisfaction in retirement.

Security benefits (annuity wealth) for support in retirement,with no financial or housing wealth (non-annuity wealth),

Q&A Responding to a question on the policy implication ofand those with the least wealth are in the poorest health.

his research, Professor Willis explained that the policy thrust

Taking into account that 60% of respondents say that theirto have people work longer, in addition to improving fiscal

retirement is "very satisfying," the proportion of those "verybalance, would be to raise their life satisfaction by keeping

satisfied" increases considerably in the highest percentiles intheir minds more active.

terms of health and annuity and non-annuity wealth.
In response to a question on the effect of education on life
In sum, wealth at death is greatest for people who remain insatisfaction, Professor Wise stated that education is strongly

two-person households the longest. There is a very strong

related to health. He further explained that support from familycorrelation between the level of assets in 1993 and thewas not included in the analysis, but that living arrangements

number of years a person survives after 1993. Furthermore,in retirement would be an important consideration. On

there is a very strong relationship between health status andthe similarity of the slopes of reduction of total wealth for

wealth at death. Finally, a large percentage of people die withall three family pathways, Professor Wise added that theannuity income only, with no financial assets, and with zerodecline is estimated based on the beginning of retirement

housing wealth. Thus, greater financial assets (and housing

and, controlling for health status, in the previous period.

What is JSTAR?
1. What is JSTAR?

JSTAR (Japanese Study of Aging and Retirement) is a

2. Outline of the JSTAR survey and thequestionnaire

comprehensive survey of elderly people aged 50 or older

1) Outline of the first wave of the JSTAR survey:

started in 2007 by RIETI, Hitotsubashi University, and,

"JSTAR First Results 2009 Report"

more recently, the University of Tokyo. It is a panel survey,

Visit http://www.rieti.go.jp/en/publications/in which the same participants were asked to answer asummary/09090002.html to download the entire text,

different set of questionnaires at each visit.

which includes detailed information on the sample
design and the response rate.

The panel data include diversified information on the2) First wave codebook of the JSTAR survey

economic, social, and health aspects of elderly people. The

Visit http://www.rieti.go.jp/en/projects/jstar/data/

questionnaires are designed to maximize comparability

jstar_1st_codebook.pdf to download the entire text,

with surveys that have been conducted in advanced

which includes the questionnaire and major statistics.

countries, including the Health and Retirement Study (HRS)
in the U.S., the Survey of Health, Aging and Retirement

3. Use of JSTAR datasets

in Europe (SHARE) in continental Europe, and the English

The JSTAR survey was conducted for the purpose ofLongitudinal Study of Aging (ELSA) in the UK. Therefore,

contributing to academic research and policymaking. The

by analyzing JSTAR data, researchers can track down

resulting data are made available free of charge, but only

the characteristics of the Japanese elderly population in

to qualified researchers, higher education institutions,terms of their specificity and universality in the world. In

and administrative agencies that have agreed to follow

this sense, JSTAR is Japan's first-ever globally comparable

the stringent conditions of use set by RIETI and only in thepanel data survey of elderly people.

case that such data are used for academic and statisticalresearch purposes (For detailed information about how toapply, please visit http://www.rieti.go.jp/en/projects/
jstar/index.html#caption03).

RIETI Highlight 2011 Special Edition

35Perspectives from Around the World — A message for Japan

Scale Startups: Meeting the
growth challenge in developed
economies after the recession
June 2011

Robert E. LITAN
Vice President for Research and Policy, Ewing Marion Kauffman Foundation
P r o f i l e
Robert E. LITAN is the Vice President for Research and Policy at the
Ewing Marion Kauffman Foundation in Kansas City, where he oversees
the Foundation's extensive program for funding data collection andresearch relating to entrepreneurship and economic growth. He also
writes frequently with the Foundation's president, Carl Schramm.
Their book, Good Capitalism, Bad Capitalism, and the Economics
of Growth and Prosperity, co-authored with William Baumol, (Yale
University Press, 2007) has been translated into ten languages and isused as a college text around the world.

growth will mean slower growth in hiring, which will keep
unemployment rates abnormally high for years, if not
decades. If workers in rich economies can't find jobs, somewill migrate, if they can, to medium-income countries, whileothers will retire early or not even work at all, if they cansustain themselves on shrinking welfare state payments. The

T

downsizing of expectations will be bitter pills to swallow forhe 2008 economic crisis began in and struck developed

many, and could easily contribute to rising social frictions andeconomies most heavily, and virtually all of them

political tensions.

(Australia and Canada being notable exceptions) are finding
it very difficult to recover. Compounding the challenge is
the wave of retirees, and the accompanying social security
and medical obligations that governments have promised toThere is only one way, in principle, to avoid these bleak
outcomes, and that is for rich countries to host or takeadvantage of new and continuous waves of innovation that

pay them. As these "entitlement programs" are cut back, ormake their citizens more productive and earn them greater

taxes increased to finance them, in order to keep structural

incomes. Rising incomes, in turn, can fuel the growth ingovernment deficits from exploding out of control, these

consumption and investment that are required to turn ameasures will add a "fiscal drag" that will slow consumer

potential vicious cycle of despair into a virtuous cycle of hope.

spending and thus growth in all of the affected countries.

U
36

nless it is reversed, slow growth could bring with it
all sorts of maladies. Most important, slower output

RIETI Highlight 2011 Special EditionP

olicy makers are too often immediately tempted to meet
any innovation challenge by increasing government

expenditures on basic research and development, in the hopethat the discovery of new ideas eventually will be translated

their initial ideas are not accepted by consumers. For all these

into new products, services, or methods of production orreasons, we tend to see disruptive innovations emerging

service delivery. Even if it were the right answer, which itfrom newer firms while large firms, with their large R&D staffs

is not clear that it is, this apparently easy fix is no longer

and big budgets, concentrate on incremental innovations.

available to rich country economies mired in debt andseeking ways to cut rather than to add to government
spending. A far more cost effective strategy is to keep open,
and ideally remove, remaining barriers to trade and directA

lso in the U.S., until the Great Recession, various papers
published or funded by the Kauffman Foundation haveestablished that new firms have been the engines of job

investment. Technological advances move most quickly fromcreation, accounting for virtually all net new jobs created

one country to another if they are carried by the movementin the U.S. economy since 1980. Recent research publishedof goods and services, and perhaps even more important, ofby the RIETI has found new firms to be important sourcespatient capital across borders.

of jobs in the Japanese economy as well.1) I have not seenYsimilar analyses for other developed economies, but I know
et even open borders do not guarantee that innovations

that in some of them (Israel and Taiwan, for example),developed elsewhere will be absorbed most effectively

entrepreneurship has been and continues to be an important

into the commercial activity of a given country. Some
progress in this direction will be made, of course, simply
by accepting and ideally giving national treatment, toforeign-owned firms that want to make investments in othercountries. But the best way to make use of and even improvesource of economy-wide growth.

If new, scale firms are vital to both innovation and job
creation in developed economies—as I believe they are—then the key to a sustained recovery from the recession, as

upon technological advances, developed at home or abroad,well as to faster growth thereafter must be the creation andis to make it easy—and ideally to encourage—the formation

growth of new, innovative firms. Truly innovative firms createof new companies that can grow or scale quickly.

wealth not only for their founder-owners, but for society asTa whole. By one account, inventor-entrepreneurs only reap
hat is certainly the U.S. experience. The truly disruptive

1/25 of the social value of their innovations for themselves,technologies that have made modern life what it is

the rest leaking out to benefit others who use their

today in the U.S. and elsewhere—the car, the airplane,technologies to create other companies.2) Think, for example,

air conditioning, virtually all aspects of computing, andof the economic ecosystems built around the automobile,

many Internet businesses, including eBay, Google, andor all of the application software tools built to work with the

Facebook—were introduced to the market and successfully

platform technologies of Microsoft's Windows or Apple's

commercialized by entrepreneurs starting new firms rather

iPhone, and you get the idea.

than by established businesses. There are exceptions to thisrule, mainly from Japanese companies, notably Toyota andHonda, which both introduced the hybrid car.

NA

rmed with this analysis, I recently conducted ahypothetical calculation for the U.S., asking how

many "scale firms," which I arbitrarily defined to be firms

onetheless, there is a reason that the exceptions

whose annual sales would eventually grow to $1 billion orprove the rule. Established companies have a vested

more, would the U.S. economy need to create each year tointerest in the status quo, especially if they helped create it

permanently raise the growth rate by one full percentage

and are profiting handsomely from it. Moreover, because ofpoint? The answer is about 30-60, depending on certain

their bureaucratic structures with layers of managers in theassumptions that went into the calculation. This is a small

decision chain, large firms typically cannot move nimbly tonumber compared to the roughly 500,000 new firms thattake advantage of new opportunities in the marketplace.

are created in the U.S. economy each year, but it is a large

In contrast, entrepreneurs don't care about the status quo

number compared to U.S. historical experience since theand indeed exist precisely to disrupt it. And they don't have

1850s, which has seen only about 10-15 such "billion dollar

layers of management and can change directions quickly if

firms" launched on average per year.3)

RIETI Highlight 2011 Special Edition

37

Perspectives from Around the World — A message for JapanF

ortunately, the task of incubating true "home run" firms isjobs away from Americans—because, by definition, the visa

less daunting once one assumes that future growth also

only would be made permanent if the immigrants actually

will be driven by smaller, but still successful firms. You don't

hired other (non-family) workers. Despite this, the politics ofneed as many home runs to run up a high growth score if theimmigration in the U.S. is so complicated and divisive that

economy can produce plenty of singles, doubles and triples.

even this sensible idea so far has gotten nowhere.

RN

ecent U.S. economic performance has been disappointing,however. Data reported by the Kauffman Foundation

ot in Chile. That country has seen the light by justlaunching a program that pays the 300 most enterprisingshow that while the number of new firms being createdentrepreneurs who apply each year the equivalent of $40,000

each year has increased somewhat since the recession, theto come to its country. Other developed economies, like thenumber of new firms with employees has dropped, and has

U.S. and even Japan might not even have to pay, if only they

been dropping for some time. I hope soon to document more

were more welcoming to such individuals.

about this disturbing trend in new research with my Kauffman
colleague, E. J. Reedy. I have not seen data on employer-based
new firms in Japan or Europe, but I would not be surprised if
these countries follow the U.S. pattern.

HJapan historically has not welcomed immigrants, despite
its aging and shrinking work force. I can understand thehesitancy to change course given the close cultural andethnic ties among Japanese people. But just as all countries

ow, then, can policymakers, who tend to be mosthave found that opening their borders to trade and capital

comfortable dealing with the challenges of larger

improved their economies, they eventually will discover thatbusinesses, best foster the creation of new scale firms, orin a global economy where companies increasingly are doing

those most likely to hire other employees? I believe thebusiness globally and attracting and needing workers fromquickest and least costly answer to this question—for

many countries, it is good business to accept and ideallyall economies, including Japan—is to permit and ideally

recruit individuals from other nations. Since immigrants

encourage the entry of all of the skilled immigrants who wantto any country tend naturally to be risk-takers—it takes

to come, not just for temporary work (which is essentially theimmense fortitude to pick up and leave your home country

case in the U.S. now), but permanently.

and move to another, after all—why not eagerly acceptIand seek out especially those individuals who want to startn the U.S., an obvious place to start would be to give all of
the roughly 65,000 foreign graduates of U.S. universities

with degrees in science, technology, engineering or math("STEM") a green card with their diplomas. The U.S. workforce
not only would benefit from this human capital, but overbusinesses?

It may be said that foreigners will find it difficult without
already spending a lot of time in Japan to launch scalecompanies. While this is surely true, this too can change

time we would get the formation and growth of a lot more

if Japan sought out more foreign students to attend theirscale businesses, given the greater propensity of immigrants

universities. There remains a fascination with Japan in theto establish such companies.

U.S. among students that Japan could tap into, especially if itAmade clear that university students who came to the country
fallback solution is to permit entry of just those

could stay if they launched businesses within a certain

immigrants who actually start businesses, withperiod of time. Such a policy would help make Japan a more

low thresholds for outside capital or initial revenue inattractive destination for younger people, and specificallythe U.S., as legislation proposed by Senators John Kerry

would help it compete with China, one of the world's favorite

and Richard Lugar would do (although I do not believe

destinations right now for people with entrepreneurial

we should keep the current cap on the total number ofambition, which still does not have the political freedoms

entrepreneur-immigrants). Giving new visas to immigrant

found in developed country democracies.

entrepreneurs avoids the greatest political impediment tomore immigration—the threat that immigrants will "take"

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RIETI Highlight 2011 Special Edition

O

f course, there are more steps that Japan will need toconsider if it wants to put itself back on a higher growthF

inally, while I earlier expressed some skepticism about theneed, and certainly the affordability, of more government

path, which this essay has argued will require a much larger

spending to promote innovation, there is more thatrate of formation of scale companies. In particular, anothergovernments in all countries can do to ensure that the R&D

significant barrier to entrepreneurship in Japan is that many

money they do spend is diffused more efficiently and quickly

larger companies provide housing or housing subsidies

in usable form through successful commercialization. The

to their employees. While this fringe benefit is important

U.S. government has channeled much of its R&D spending

and highly valued by Japanese workers in light of the highinto universities, which have had some success in translating

housing costs in the country, especially in or close to major

their discoveries into commercial products and services. But

cities, it also discourages those Japanese workers who are

I believe the U.S. can do better. One place to start would be

most likely to build new successful companies—individuals

for the U.S. government to require that university recipients

whose work experience has given them the insights into newof government R&D funding give their faculty inventors themarkets and opportunities that all entrepreneurs require—right at least to license their technologies without being

to leave the comfort of their large companies to strike out on

forced to use the licensing services of their own universities.

their own. I am hesitant as an outsider to know how best to

Introducing competition into the licensing of facultychange Japanese practices in this regard, but perhaps one

innovations would only speed more of them to commercial

place to start is with tax incentives or penalties for Japanesesuccess.

companies to abandon this practice and pay workers higher
wages to compensate for the loss or cutback in employee
housing benefits.

AM

y understanding is that in Japan, much government
R&D money is channeled to government labs and toindustry directly, and compared to the U.S., much less tonother important impediment to entrepreneurship inuniversities. I do not have sufficient knowledge of how thisJapan, as it is elsewhere, is the stigma or shame thatsystem might be reformed to generate more commerciallyindividuals suffer if their businesses fail. The ability to failsuccessful products at a faster pace, but perhaps thewithout shame, and indeed even with honor, has contributed

government could experiment with ways of either giving theimportantly to the success of entrepreneurs in California's

individual inventors some property rights in their inventions

famed Silicon Valley. Indeed, many venture capitalists andor some other monetary awards once those inventions areangel investors in the U.S. will not invest in a new company

commercialized.

unless its founder already has failed before and thus learned
what mistakes not to make in his or her next ventures.

Here, too, I am reluctant to offer concrete suggestions

In summary, the developed world faces extraordinary
challenges in the years ahead, not only mounting a

recovery from the deepest recession of the post-war era

how to change Japanese attitudes toward businessbut in finding ways to boost growth on a sustained basis

failure, which are clearly cultural and not easily alteredwithout spending money that governments do not have. The

through one or more policy changes. Perhaps one place

futures of their citizens and of much of the world hang in theto begin is in schools, even as early as elementary school,balance.

but certainly in universities, to teach students that someof the best learning comes through failure. Even the mostsuccessful Japanese companies (let alone many companies
elsewhere) have had to learn, through a process of trial
and error, before coming out with a solution that is widely
accepted by consumers. This process of failing as a predicate
for later success is something that should be acknowledged
and welcomed by Japanese business and thought leaders.

1) See FUKAO Kyoji and KWON Hyeog Ug, "Sources of Future Economic
Growth in Japan: An empirical analysis based on micro-data," RIETI
Discussion Paper Series, 11-J-045, English abstract available at: http://
www.rieti.go.jp/en/publications/summary/11040008.html
2) William D. NORDHAUS, "Schumpeterian Profits and the Alchemist Fallacy,"
Yale Working Papers on Economic Applications and Policy, Discussion
Paper No, 6, 2005, available at: http://www.econ.yale.edu/ddp/ddp00/
ddp0006.pdf
3) Robert E. LITAN, "Inventive Billion Dollar Firms: A Faster Way To Grow,"
Kauffman Foundation, December, 2010, available at http://papers.ssrn.
com/sol3/papers.cfm?abstract_id=1721608

RIETI Highlight 2011 Special Edition

39Perspectives from Around the World — A message for Japan

Global Imbalances are Back!
July 2011

Pier Carlo PADOAN
Deputy Secretary-General and Chief Economist, OECDP r o f i l e
Pier Carlo PADOAN took up his functions as Deputy SecretaryGeneral of the OECD on June 1, 2007. As of December 1, 2009, he wasalso appointed Chief Economist while retaining his role as Deputy
Secretary-General. In addition to heading the Economics Department,
he is the G20 Finance Deputy for the OECD and also leads theStrategic Response, the Green Growth, and Innovation initiatives of
the Organisation and helps build the necessary synergies between
the Economics Department and that of other Directorates.
Prior to joining the OECD, he was a Professor of Economics at
the University La Sapienza of Rome, a Director of the Fondazione
Italianieuropei, a policy think-tank focusing on economic and social
issues, and the Italian Executive Director at the IMF from 2001 to 2005.
He served as an Economic Adviser to Italian Prime Ministers Massimo
D'Alema and Giuliano Amato, in charge of international economic
policies from 1998 to 2001.
He has a degree in Economics from the University of Rome and has
held various academic positions in Italian and foreign universities. He
has published widely in international academic journals and is theauthor and editor of several books.

T

he debate about global imbalances usually refers
to the large current account deficits and surpluses

that co-exist around the globe. As such, they are notT

he adjustment burden of global imbalances inthose days initially tended to be borne by deficit

countries alone. The view that surplus countries

a new phenomenon. Already in the 1980s the United

should adjust was heavily contested, typically by thoseStates was running a massive current account deficit,

countries identified as "best placed" to do so, notably

financed to a large extent by surpluses in Germany andWest Germany and Japan. However, after monetary

Japan. This imbalance pointed to an overvalued U.S.

policy was eased in response to the 1987 stock market

dollar exchange rate—in part due to the mix of fiscal

crash, a financial and real estate bubble began toexpansion and tight monetary policy of the Reagan

develop in Japan, while a boom in real estate markets

administration—and was feeding into disquietingin Germany was prompted by positive money supply

protectionist measures. This eventually led to a revival

and confidence shocks associated with its reunification.

of international cooperation after it had fallen out ofBoth popped in the early 1990s. Similar developments

grace in the late 1970s, important manifestations being

were seen in the Nordic countries, as well as in thethe Plaza (September 1985) and Louvre (February 1987)

United States, culminating in the Savings and Loans andAccords to realign exchange rates through intervention

LTCM crises.

in exchange markets and the coordination of monetary
policies.

G

lobal imbalances largely disappeared from theradar screen in the 1990s, but this dramaticallychanged when emerging market economies entered

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RIETI Highlight 2011 Special Edition

the picture. Since the mid-1990s the world economy

excessive risk taking and leveraging and, ultimately, thehas become increasingly integrated, owing to thefinancial crisis.

removal of trade barriers, the liberalisation of capital
flows, the spread of new technologies and—last but
not least—the fall of the Iron Curtain. World tradesoared and cross-border flows grew from around 5%T

he phenomenon of historically large currentaccount imbalances across the world is partly

a reflection of high and rising commodity prices, inof world GDP in the mid-1990s to about 20% in 2007—

particular the oil price, leading to massive current

the year preceding the global financial and economic

account surpluses among the major oil exporters. But itcrisis. External assets and liabilities as a share of world

can also be seen as a consequence of the globalisation

GDP more than doubled over this period, from 150% toof financial markets, with the home bias in financial

350%.

investment largely removed. In principle, such aTdevelopment is welcome to the extent it results inhe case of China, now the second-largest economy

better international allocation of capital. This is basedin the world, deserves a separate mention. China's

on the premise that normally capital "flows downhill,"

accession to the World Trade Organization (WTO) in

i.e. from high-income to low-income regions in the2001 represented a milestone in its engagement withworld where the marginal return on capital is highest. It

the world economy. China has been running large

would thus contribute to the convergence of per capita

current account surpluses while also attracting large

GDP across the world.

inflows of foreign direct investment from the OECD
area. Coupled with an exchange-rate policy of pegging
the currency to the U.S. dollar and strict capital controlson capital outflows, this led to the build-up of over $3

However, rather than flowing downhill, capitalhas been flowing uphill to a large extent, withemerging market economies massively investing

trillion worth of foreign exchange reserves—almost

in financial instruments issued by the advanced

50% of GDP and one third of the global total. The bulk

economies, notably the United States, attracted byof China's official reserves have been invested in U.S.

its (supposedly) better quality of financial markets.

Treasury bonds, allowing the United States to finance

Presently, downhill capital flows are gaining

its large current account deficit at favourable terms andimportance, as excess liquidity in the advanced

to keep its bond yields low.

economies is looking for yields in the emerging market

I

economies. But paradoxically this may be too muchn addition, globalisation meant a massive increaseof a good thing. Emerging market economies find it

in the global supply of low-skilled labour in thehard to absorb this capital properly. They face risks ofworld economy, and this had substantial real-economy

Dutch disease (export squeeze due to appreciating realeffects. Not only were emerging market economies now

exchange rates), overheating, and instability.

a major driver of global growth, they also kept inflationin the developed economies low via growth in cheap
export products, economies of scale associated withG

lobal imbalances eased in the aftermath of thecrisis. Deleveraging prompted smaller current

integrated supply chains, and competition. Graduallyaccount deficits among many advanced economies.

this development was offset by the effect of buoyant

Policy stimulus to ward off recession along with ademand on oil and commodity prices, but this was

decline in primary commodity prices led to smaller

largely discounted as not being part of "core" inflation.

current account surpluses among emerging market

In addition, in some OECD countries policy interest

economies and commodity exporters, respectively. Even

rates were systematically lower relative to the guidanceso, global imbalances are set to resurface. Commodity

offered by simple normative policy rules, such as

prices are recovering and emerging market economies

the Taylor rule. In the context of malfunctioning andare cutting back demand stimulus in the face of highpoorly supervised financial markets, this contributed toinflation. The underlying propensity to save remains

RIETI Highlight 2011 Special Edition

41

Perspectives from Around the World — A message for Japanhigh among many emerging market economies, and inreverse. Banking crisis or currency crisis can easily ensue

some advanced surplus economies such as Germany

and cause longer term damage. This has been, by theand Japan as well, while growing public indebtedness

way, the main motivation for many emerging market

is boosting the demand for capital among advanced

economies to "self-insure" against instability throughdeficit countries—including in parts of Europe.

the build-up of foreign exchange reserves. This, inAterm, prevents exchange rate adjustment, complicatesrisk associated with continued global imbalancesin current account positions is that their unwinding

could be disorderly—perhaps even more so now in theaftermath of the crisis than prior to the crisis. If biased
towards deficit countries, the adjustment would slow

monetary policy, and is relatively costly.

Therefore, it would be much better to develop
structural solutions to stem the risk of instability

associated with capital inflows. Specific reform options

the global recovery at a still delicate time. Fiscal stressare multiple. The advanced economies should continue

in advanced deficit countries could prompt exchange

to deal with systemic risk such as the adoption ofrate and interest rate volatility. Protectionism could

Basel III and tighter capital requirements for global

roar its ugly head. To prevent such damaging scenarios,

systemically important financial institutions. They

surplus countries should allow a gradual but sustained

should also design and implement cross-borderreal exchange rate adjustment and deficit countries

banking resolution schemes and monitor shadow

should restore private and public balance sheets.

banking and non-banks. Emerging market economies

International coordination could help to speed up thisshould promote more market based financial systems

process.

and develop local financial markets and open theirTcapital account. They should also increase the quality of
he G-20 Framework for Strong, Sustainable andproduct market regulation and adopt less stringent job

Balanced Growth has a useful role to play here, byprotection while boosting the quality of human capital.

seeking complementarities between macroeconomic

This is expected to increase long-term capital flows toand structural policies in the pursuit of global

emerging market economies along with a shift fromrebalancing. Possible avenues for structural policy

debt to more stable foreign direct investment.

contributions are: i) the development of welfare
systems and financial systems in the emerging market
economies to stem the need for precautionary savings
and relax borrowing constraints, respectively; ii)B

ut such structural policies—useful as they may be—
are unlikely to stem or change the compositionof the ongoing short-run capital flows to emerging

pension reforms in advanced economies (increased

market economies. Soaring short-run capital flows to

retirement age to reduce savings propensities in surplus

emerging market economies can be explained by thecountries, lower replacement rates to increase saving

easy monetary conditions in the advanced economies—

propensities in deficit countries); iii) product market

indispensible in view of their current fragility. Liquidity

reforms to encourage domestic investment in advanced

is hunting for yield, and where else would they besurplus countries; and iv) the removal of tax incentives

expected to do so than in the emerging market

for debt financing to encourage savings in advanced

economies, given their—equally indispensable—tighter

deficit countries.

monetary conditions.

W

R

hile the crisis raged, the gross capital flows fromand among advanced economies collapsed. Gross

capital flows have shown an incipient rebound in 2010,

ecent work has suggested that apart from letting
the exchange rate bear some of the brunt of theadjustment, macroeconomic policies constitute a first

but the bulk is now directed towards emerging market

line of defence. Emerging market economies could

economies. Past experience has shown that such capital

pursue a counter-cyclical fiscal policy so as to takeflows can be a source of instability if they suddenly

off some of the pressure. Macro-prudential measures

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RIETI Highlight 2011 Special Edition

may be a second line of defence insofar as they may
prevent capital inflows from generating a domesticCo-operation is also necessary if the internationalmonetary system is to be strengthened. Eventually,

credit bubble with associated financial fragilities. Only

real exchange rates will move in line with policy differences

as a third line of defence should one consider capitalas well as different growth rates, inflation, and fiscal

controls. The acceptance of capital controls as the last

positions. Specifically, over time it would be expectedline of defence comes, however, with certain risks. To bethat emerging market economies would experience a

specific, capital controls are politically more convenient

real appreciation. If the nominal exchange rate is fixed,

to use than the first lines of defence—they can in effectthe required changes have to come through adjustments

become a cover for inappropriate macroeconomic

to wages and prices, which can be costly as it would risk

policies. Capital controls can also entail distortions. Andde-anchoring inflation expectations. Persistent currency

capital controls keeping out capital flows in one country

misalignments in the interim can generate unsustainable

may spill over elsewhere.

external imbalances. Hence reforms are needed to facilitateTthe movement of exchange rates in line with economico prevent such adverse effects of a proliferation

fundamentals so as to ensure that nominal exchange-of capital controls it might be good to have somerate adjustment acts as a safety valve. On the other hand,international surveillance process that establishes
procedures and creates transparency about countries'
policies. The OECD has a set of Codes concerning
capital account policies. While the end-goal is freeexcessive exchange-rate volatility can also have its costs.

To sum up, global imbalances remain at the forefront ofour preoccupations. There are essentially three major

capital movements, the codes allow countries to set

challenges: two structural, one cyclical. The first structural

reservations on specific items and also allow them tochallenge is to increase the net savings of several major

become more restrictive if needed. But they will haveadvanced economies and to reduce that of the surplus

to come and explain to other countries what they are

economies, including (but not exclusively) in emerging

doing, and having such a transparent process may help

market economies. To achieve this, emerging market

to establish some discipline. The OECD Codes may beeconomies need to develop their social welfare systems

useful as a source of inspiration, but have in any caseand deepen their financial markets while incentives forrecently been opened to adherence by non-OECDleveraging in some major advanced economies should becountries.

eased.

MT

ore fundamentally, mechanisms need to befound to allow different policy settings to co-he second structural challenge is to secure a stablegross flow of capital from advanced economies toexist across the globe in a way that promotes economic

emerging market economies. This remains essential forstability and growth. This will require international co-

global convergence, though it must be financed to aoperation, surveillance and communication in setting

greater extent by domestic savings in advanced economies

priorities and in minimising any potential adverse side-

now running current account deficits. This requires intereffects that can arise from the resulting geographicalalia a further opening of capital accounts and better

constellation of policies. One aspect of this is thequality product market regulation in emerging market

international effort under way to strengthen prudential

economies. The short-run challenge is that abundantframeworks around the world. Beyond this, the role ofliquidity in advanced economies is hunting for yield in

the G20 Framework for Strong Sustainable and Balanced

emerging market economies, where it can generate Dutch

Growth is to identify a combination of macroeconomic,

disease, overheating, instability, and protectionism. This

structural and exchange-rate policies that strengthensshould be tackled by a combination of exchange rate

growth prospects and helps to achieve more sustainableadjustment, counter-cyclical fiscal policy, and micro- andfiscal positions, whilst minimising the risks of a renewed

macro-prudential tools. Capital controls should be seen as

widening in global imbalances.

a last resort.

RIETI Highlight 2011 Special Edition

43

Introduction of Research Programs

International Tradeand Investment Program
WAKASUGI Ryuhei

Faculty Fellow / Program Director(Professor, Institute of Economic Research, Kyoto University)Under the third medium-term plan that started thisparticular, how the Japanese economy, which is recovering

fiscal year, the International Trade and Investment

from the Great East Japan Earthquake, should cope with theProgram will continue the international economic researchinternational economy is an extremely important issue. The

undertaken in the Formulating Japan's Strategy in Response

objectives of the four projects comprising this program are

to Globalization and Deepening Economic Interdependence indescribed below.

Asia Program during the second medium-term plan, and willfurther deepen policy research. In the program, researchers
from the fields of economics, management, law, and politicalscience will study international trade, direct investment,T

he Study of the Creation of the Japanese Economy andTrade and Direct Investment project (project leaders:

WAKASUGI Ryuhei, FF & PD and TODO Yasuyuki, FF) willtechnological innovation, and economic growth, as wellfurther develop the research based on the results of the Studyas trade policies and international economic rules related

on International Trade and Firms project undertaken in theto these issues. The scope of the research is quite broad; insecond medium-term plan period. Thus far, both theoreticaland empirical analysis have been conducted and policy
proposals made that incorporate firm heterogeneity, taking
firms' internationalization (i.e., export and foreign direct
investment (FDI)) as the key to Japan's economic growth.
The project will be developed to cover the effects of exports
and FDI by Japanese firms on employment, the impact ofthe protection of international property rights on corporate
R&D and innovation, and the impact of internationalizationof firms on international technology transfer. It will also takenote of the developing Chinese market and will analyze theagglomeration and internationalization of firms (i.e., exports
and FDI) and the growth of the Chinese economy. Of particularnote is the fact that the Great East Japan Earthquake has
caused a massive shock to Japan's society and economy. How
to overcome this serious damage will be the key to future
development of the Japanese economy. In this project, to

44

RIETI Highlight 2011 Special Edition

achieve the creation of a new Japanese economy after thedamage from the Great East Japan Earthquake, research willCorporate production technology is directly connected
to competitiveness, so firms are engaged daily in abe undertaken to examine the issues on the international

competition for technology development and acquisition,transactions (trade and foreign investment) of firms,

and corporate activities aimed at improving productivity andparticularly the new production networks in global markets,

technological capabilities are a source of economic growth. In

industry agglomeration, and the response to the electric

the past, Japanese firms have enhanced their productivity andpower supply restrictions. The project will be conducted by 10

technological capabilities through globalization, particularly

researchers.

through exports and FDI. Recently, they have been making
acquisitions with the aim of incorporating technology asThe population decrease, low birthrate, and aging society

well as technology transfer and outflow in connection withare exacerbating the problems of domestic market

offshoring. The various issues regarding corporate technology

contraction and labor force supply restrictions, and the growth

are closely tied to the advancement of economic globalization.

of emerging economies is causing a relative sagging of the

The Economic Analysis of Technology in the Global Economy

Japanese economy. Meanwhile, the future of the World Trade

project (project leader: ISHIKAWA Jota, FF) will theoretically

Organization (WTO) round of negotiations remains unclear

and empirically analyze various technology-related issues

while free trade agreement (FTA) networking is advancing.

including technology development, imitation, protection,

What trade policy should be adopted is becoming increasingly

transfer, diffusion, and standardization from an international

important for the Japanese economy. Regarding the choiceeconomics perspective, and draw policy implications thatof such an important trade policy, free trade is supported bywill help make the improvements in productivity andmany economists; however, it is a fact that there are manytechnological capabilities that are vital for Japan to achieve

who have a sense of resistance to the realization of free trade.

global economic growth.

There is a possibility that individual characteristics that are
not assumed by standard economic theories have an impact
on the approval or disapproval of trade policies. The Empirical
Analysis of Trade Policy Preferences at the Individual Level

International economic transactions are based on various
treaties and agreements, and one cannot disregard theimpact that the contents of such treaties and agreements havein Japan project (project leader: TOMIURA Eiichi, FF) willon the Japanese economy. The Comprehensive Research on

conduct surveys and empirical research based on such surveys

WTO project (project leader: KAWASE Tsuyoshi, FF) will further

regarding public support on the choice of trade policy and willdevelop the results of the second medium-term plan andprovide foundational knowledge for forming Japan's trade

analyze the WTO and other international trade orders for trade

policy.

and investment from legal and political viewpoints and makepolicy proposals.

Research Projects under International Trade and Investment Program

Project Leader

Study of the Creation of the Japanese Economy and Trade andDirect Investment

WAKASUGI Ryuhei

Comprehensive Research on WTO

KAWASE Tsuyoshi

Empirical Analysis of Trade Policy Preferences at the Individual Level in JapanTOMIURA Eiichi

Economic Analysis of Technology in the Global Economy

ISHIKAWA Jota

RIETI Highlight 2011 Special Edition

45

Introduction of Research Programs

International
Macroeconomics Program
ITO Takatoshi

Faculty Fellow / Program Director(Professor, Faculty of Economics and Graduate School of Public Policy, The University of Tokyo)A

mid rapidly advancing globalization, it is far from

This International Macroeconomics Program will advancecertain if the growth engine of the Japanese economy,

research projects spanning fields such as macro finance,

its superiority in monozukuri (manufacturing) and exports,

international trade and macroeconomics, international

will remain as it did in the past. There is a need to consider

finance, corporate foreign exchange risk management, andhow the growth in emerging markets can be internalized

corporate finance. The relationship among individual projects

by the Japanese economy and what is needed for Japan,

can be set out as seen in the chart below.

which is surrounded by the rapidly growing neighboring
countries of Asia, to realize balanced sustainable growth. Now
that Japan is faced with its biggest post-war challenge, theFirst of all, two research projects will focus on the domestic
factors of the Japanese economy that are striving toeconomic recovery from the Great East Japan Earthquake,recover from the earthquake disaster. In the 3) Research on

the macroeconomic management of Japan is fraught with

Macroeconomic Policies Focused on Fiscal Reconstructiondifficulty. In future macroeconomic policies, it is important toand Similar Measures project, the sustainability of Japan's

develop new systems by being conscious not only of domestic

public finances is deemed an essential condition for thefactors but also of international aspects.

steady advancement of economic recovery. Theoreticalanalysis will be conducted on the relationship between fiscal
reconstruction and the financial system as the holder ofgovernment bonds. In the 4) Long-term Deflation in Japan:
Its causes and policy implications project, instead of treating
long-term deflation as a simple monetary phenomenon, it istreated as a phenomenon deeply related to the real aspects ofthe economy (i.e., long-term stagnation of the real economy).
The objective will be to elucidate the correlation between
abnormalities occurring in the real and monetary parts of theeconomy.

On the international front, two research projects will
specifically focus on the relationship between Japan andAsia, namely, the 1) Research on a Currency Basket project andthe 2) Research on Exchange Rate Pass-through project.
The currency basket project will continue to propose the useof the Asian Monetary Unit (AMU), which has been made46

RIETI Highlight 2011 Special Edition

public on RIETI's website since 2005, and the AMU Deviation

macroeconomic policies to achieve fiscal reconstruction andIndicator in order to stabilize exchange rates within the

breakaway from long-term deflation in view of their effects

region. Additionally, research on a new international currency

on foreign exchange rates. As for Asia, studies on institutional

system and an appropriate new currency system in Asia will

infrastructure such as the role of a common basket currency

be undertaken. In the exchange rate pass-through project,

and analysis of various issues related to the exchange ratevarious issues related to pass-through and a closely linked

pass-through and invoice currency selection, with their effectsubject, trade invoice currency selection, will be analyzed

on the supply chains of Japanese firms, will be undertaken.

from both macroeconomic and corporate-level perspectives.

As for the world economy, new policies on trade and foreign

Factors such as pricing, foreign exchange risk management,

exchange will be proposed in the 5) Great Trade Collapse

production/sales networks, and corporate competitivenessproject. Therefore, where necessary, collaboration between

will be the keywords in this research.

projects will become important. The program director will be
responsible for monitoring the progress and performing thisIn the 5) Great Trade Collapse project, which will start after

function. Collaboration with other RIETI programs will also be

September, the macroeconomic effects of the drop in tradepursued to improve research results.

that the world economy experienced during the recessionary
period of 2008-2009 (the "Great Trade Collapse") on theJapanese economy will be analyzed. Structural changes insupply chains will be one of the areas to be focused on.

Japanese firms are pricing their products and services basedon the trends in the foreign exchange rates and supply anddemand in domestic and overseas markets. But their practices
vary depending on the competitiveness of their products, theAs mentioned above, in this program, issues on internationalcountries to which they export, and differences in their foreign

macroeconomics are analyzed by using various approaches.

exchange risk management. By adding the collection of such

But, as shown in the chart, each project theme is closely related

corporate-level micro-data and related analysis to the projects,

to the others. Research will be conducted along a spatial

the program will grasp the Japanese economy from a wide

axis involving the Japanese, Asian, and world economies.

range of perspectives, thereby leading to research that directly

As for the Japanese economy, studies will be performed oncontributes to macroeconomic policy.

International Macroeconomics Program: Spatial axis
Japanese Economy(Recovery from theearthquake disaster)Monetary
Economics

4) Long ‐ term Deflation in Japan:
Its causes and policy implications(Corporate price setting)Exchange rate fluctuations

3) Research on Macroeconomic Policies
Focused on Fiscal Reconstruction and
Similar Measures(Fiscal reconstruction andfinancial systems)

Asia

National
borderGlobalEconomy（Emerging markets）
1) Research on a Currency Basket(Regional financial cooperation)

Foreign exchange risk
management

International
Finance
Markets andregulations5) Great Trade Collapse

2) Research on Exchange
Rate Pass-through(Selection of invoice currency)

New Open
Macroeconomics
Pricefluctuations
Competitiveness of
products and markets

Corporate
Finance

Supply chains

Macroeconomic policies(trade/exchange rate)

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Introduction of Research Programs

Regional Economies
Program
HAMAGUCHI Nobuaki
Faculty Fellow / Program Director(Professor, Research Institute for Economics and Business Administration, Kobe University)In the past, Japan conducted a regional policy which

dilemma to the concept of balanced regional development.

promoted the shift of large companies' factories to rural

areas while improving the infrastructure of specific regional

In the Regional Economies Program, we would like to present

locations. By decentralizing production, economies of scale

the perspective that planning for the balanced development

were sacrificed. However, by spreading growing employmentof the regions will lead to maintaining the growth of the whole

opportunities to these areas, the overcrowding of the urban

Japanese economy.

areas and regional disparities was mitigated, and the sustained
growth of the Japanese economy was supported. For thepresent Japanese economy, which is seeing a hollowing-E

ach region has diverse resources that can be used for
production. Highly mobile resources such as capital goods

out of industries under the strong yen, knowledge-intensive

and knowledge-intensive workforces have a high tendency toactivities such as manufactured products involving advanced

concentrate geographically. On the other hand, the locations

technology and services are thought to be growth industries.

of general workforces are dispersed, and there are immobile

But industries that benefit from the spillover of knowledge areresources such as land. There are also resources that have adestined to agglomerate around large urban areas, posing ahigh adherence to a region but disappear with the collapseof the regional community, such as jointly-owned knowledge
in traditional industries. To develop knowledge-intensive
industries in the large urban areas and redistribute theirincome to the regional areas are not the relevant issues here.
Rather, it is that each region finds its own growth strategy, onethat is consistent with the market mechanism and utilizes its
distinctive features. Such strategy should make globalizationand the economic integration of East Asia a precondition, andshould strive to incorporate the dynamism of the growth ofthe outside world. In other words, the market is global even at
the regional level, resources that are scarce should be broughtin from outside, and, while achieving economies of scale,making utmost use of the resources that are abundant in theregion.
As an illustration, the population of Finland, which is known
for its success with the cluster policy, is a little over five million,

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RIETI Highlight 2011 Special Edition

about half that of Japan's Tohoku region. However, its perhome to firms that comprise links in the supply chains of thecapita income in nominal terms translated into U.S. dollars

automobile and electronics industries and are producing parts

is about 1.5 times that of Japan. Accordingly, the size of thefor which substitutes are difficult to find. One of the factors

economy is not that important for maintaining a high standard

that led to the development of such production capabilityof living. The Tohoku region exports only 2% of its total

at these locations was the existence at appropriate costs ofproduction and is highly dependent on domestic demand.

1) the quality of the technology required by firms that sell

In contrast, Finland exports more than 20% of its GDP, nottheir products globally as well as 2) personnel and factory

counting exports to the EU market (which occupies a position

sites that make such large-scale production possible. If mass-similar to that of domestic demand for Tohoku). (Total exports,

production type of manufacturing can be firmly establishedincluding those to the EU, are at 45% of GDP.) This shows thatin the regional areas in the future, it will provide the basis forthe country turns more of its attention to foreign markets thanthe development of highly creative research and development

do the Japanese regions.

activities in the large urban areas and will answer the needfor balanced regional development. In this program, researchIt is probably unavoidable that the production activities ofon regional policy, urban policy, and appropriate regional

Japanese firms will move overseas due to globalization.

administration will be further developed from such policy

Nevertheless, those that remain and expand in Japan and theresulting economic balance between domestic regions should
differ depending on the strength of linkages among domestic
regions and between each region and the world economy.
This research program will address such understanding ofperspectives.

H

owever, owing to an enhanced awareness of business
continuity plans after the earthquake, the risk ofgeographic concentration of specific parts production has

the issues from the perspective of spatial economics, whichbecome more explicitly assessed. This has forced on us a new

expressly considers the movement of production factors.

issue, namely, in order for Japan to maintain international

We will produce theoretical forecasts, empirically analyze

competitiveness without being excluded, it is importantstatistical information, and meticulously gather and dissect

for industrial agglomeration to seek economies of scale toqualitative information for that purpose.

balance the control of such risk. In this program, we will not
only research the strengthening of links among regions and

For example, it has been recognized anew that the area

between a given region and the world but also the appropriate

spanning from Ibaraki prefecture to the Tohoku region,industrial location policies and regional policies to solidify theheavily affected by the Great East Japan Earthquake, isresilience of supply chains.

Research Projects under Regional Economies Program

Project Leader

Studies on the Structure of Japanese Economic Space and Japanese Supply
Chains Sustaining Growth Under Globalization and Disaster Risks

HAMAGUCHI Nobuaki

Theory and Empirics of Urban Growth and Spatial Structure

TABUCHI Takatoshi

Formation of Economic Agglomerations and the Emergence of Order in their
Spatial Patterns: Theory, evidence, and policy implications

MORI Tomoya

Research of a Mechanism for Regional Revitalization

NAKANISHI Hodaka

Development Policies for Robust Regional Economies, Learned from theGreat East Japan Earthquake of 2011

OKUMURA Makoto

Sustainable Regional Development: New industrial clusters anddivision of functions

NAKAMURA Ryohei

RIETI Highlight 2011 Special Edition49

Introduction of Research Programs

Technology andInnovation Program
NAGAOKA Sadao

Faculty Fellow / Program Director(Professor, Institute of Innovation Research, Hitotsubashi University)The most fundamental solutions to the constraints on

the direction of policies and institutional developments ineconomic growth, such as the increasing scarcity oforder to accelerate them.

energy resources and global environment constraints, are thedevelopment of new technologies directly addressing these
constraints and the innovations based on them. Furthermore,There are three features of this program. The first is thedevelopment of an original database that can identify

the development of new pharmaceuticals and diagnostic

the process of technology development and of innovation.

technologies is also the key for improving longevity andIn cases of technology development, as an example, it isquality of life for humankind. The objectives of the Technology

relatively easy to grasp statistically the gross expenditure for

and Innovation program are to create an original database

corporate research and development (R&D), but this onlythat is useful for identifying the process of the development of

measures personnel expenses for researchers employed andsuch new technologies as well as innovation, and to analyze

other monetary expenditures such as purchasing researchequipment. What is extremely important in technology
development, however, is the knowledge itself, such as
information from users and suppliers and the technology
seeds obtained from scientific and technical literature andfrom university collaborations. The quality of the stock ofsuch knowledge and the ability of a firm to absorb it as wellas to integrate and combine acquired knowledge are what
determine R&D performance. This program aims to develop,
through a survey of inventors and other means, a micro
database that is capable of systemically identifying the flow
and the new combination of knowledge for innovation.
The same applies to the process of development anddissemination of standards as well as to establishing businessstartups.

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RIETI Highlight 2011 Special Edition

S

T

support technology development and innovation, such as

development and analysis. When assessing Japanesethe systems for patents, standards setting, start-ups, R&D

innovation performance, the comparisons with the United

assistance, and industry-academia collaboration. Historically,

States and Europe are crucial. In a project during the second

the continuous development of new technologies as seen

medium-term plan in which the program director served astoday started only after the onset of the Industrial Revolution.

a leader, we undertook a large-scale survey of inventors in

The fact that only industrialized nations are undertaking full-Japan and the United States, in collaboration with Professor

fledged R&D also suggests the importance of institutions inJohn WALSH of the Georgia Institute of Technology. This

technology development and innovation. The patent system,

was the first such survey in both countries, and we were

for instance, serves diverse functions such as increasing

able to provide interesting findings on the differences

appropriability for knowledge production, promoting

between the two countries in the invention and innovationcommercialization investments that exploit inventions,process. Based on these experiences, in cooperation with

providing a mechanism of reputation establishment forProfessor Dietmar HARHOFF of the University of Munich

inventors and firms, and expanding the stock of publicand Professor Alfonso GAMBARDELLA of Bocconi University,

knowledge through disclosure. Most research in the past

we have been conducting a new survey on inventors intargeted the effects of the patent system on appropriability.

Japan, Europe, and the United States. With regard to the

In this program, we will extend research to other functions,analysis of entrepreneurial activities, we plan to clarify theparticularly the expansion of the stock of public knowledge

characteristics of start-up activities in Japan, using the Global

through disclosure. According to the results of the survey ofEntrepreneurship Monitoring Database, an international

inventors conducted by RIETI under the program director, thedatabase on this subject. Furthermore, in the area of standard

importance of the information disclosed through the patent

policy, we plan to proceed in collaboration with Professor

system differs greatly by technology field. Our research will

Nancy GALLINI of the University of British Columbia andthus aim at identifying the causes of such differences and thethe other internationally renowned experts in the areas ofissues faced in improving them, among others.

theoretical analysis of standard and intellectual property.

econd, this program intends to conduct original analysis
and make proposals on improving the institutions thathe third feature of this program is the promotion ofinternational collaboration in research on database

Research Projects under Technology and Innovation Program

Project Leader

Research on Innovation Process and its Institutional Infrastructure basedon Micro Data

NAGAOKA Sadao

Standard Policy for Innovation

AOKI Reiko

Empirical Study on the International Comparison of Open Innovation

MOTOHASHI Kazuyuki

International Comparison of Business Start-up Activities and Research of
Entrepreneurial Activities Resulting in Job Growth

TAKAHASHI Noriyuki

Research on the Interactions Between the Business Strategies of Excellent
Small and Medium Enterprises (SMEs) and their External Environment

INOUE Tatsuhiko

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51

Introduction of Research Programs

Raising Industrial andFirm Productivity Program
FUKAO Kyoji

Faculty Fellow / Program Director(Professor, Institute of Economic Research, Hitotsubashi University)For a country with a shrinking population like Japan tofor Japan and various East Asian countries are measured, andmaintain its economic vitality and affluence, raising

analysis is performed on the kind of policies required to raise

productivity is an urgent issue. The status quo based on

productivity. This program comprises seven projects as shown

international comparison by the UN and the OECD for 2009

in the table below, and the character of the whole program

has Japan in 19th place (71% of the value of the U.S.) among thecan be summarized as follows:

34 OECD countries in per capita GDP, when calculated usingpurchasing power parity, which reflects differences in pricelevels. Even if the market exchange rate is used, in which theyen has been very strong, Japanese per capita GDP still stands

T

he first characteristic of the program is that it will
construct and update industrial and regional databases,

including the Japan Industrial Productivity (JIP) Database,at 88% of that of the U.S. and 83% of that of the Netherlands.

and, in principle, make all data available to the general publicThis indicates that by catching up on productivity, there is

as public property. These databases will be used as basic

still ample room for increasing our income. In this program,materials for analyzing the industrial structures, industrial

industry- and firm-level productivity and their determinants

productivity, and regional economic structures of Japan andEast Asia. More specifically, in collaboration with Hitotsubashi
University, the program will update and expand the JIP
Database and concurrently construct the new China Industrial
Productivity (CIP) Database. It will also build an industrial
productivity database by prefecture for Japan and examine
the impact of the recent earthquake on regional economies
and subsequent reconstruction policies.

The second characteristic is that the program recognizes
and analyzes the productivity trends at macroeconomic

and industrial levels as the aggregation of productivity
trends of firms and plants that comprise the industry and thewhole economy. By utilizing micro-data from government
statistics and corporate financial data, this approach opens
up a new research area on the determinants of productivity
and will enable the provision of definite knowledge on policy

52

RIETI Highlight 2011 Special Editioneffects. In particular, Japanese and Chinese micro-data from(ADBI), National University of Singapore, Harvard University,

government statistics and corporate financial data will be

and University of Groningen, the program aims to push ahead

used to study issues such as the determinants of productivity

with the construction of the Asia KLEMS Network, which

differentials between firms, the effects of globalization andmeasures the industrial structure and productivity of various

changes in demand on corporate performance, policies for

Asian countries and compares them with other regions ofraising productivity in the service sector, and the comparison

the world. Second, the program will continue to provide dataof productivity dynamics from an international perspective,

on Japan's industrial structure and productivity to the EU's

including productivity differentials between Japanese,

World Input-Output Database (WIOD) project, World KLEMS

Chinese, and Korean firms. A firm-level database that measuresproject, the OECD, etc. Third, the program will cooperate withand internationally compares total factor productivity of

researchers of the Economic and Social Research Instituteall listed firms of Japan, China, and Korea is planned to be(ESRI) of the Cabinet Office of Japan on the construction of aconstructed and made public. Additionally, at the industry

productivity database directly linked with System of Nationaland firm levels, the program will measure investment in

Accounts (SNA) statistics and the development of methods forintangible assets such as research and development, software,measuring the output of non-market services such as healthin-house training, and organizational change—all of which arecare and education. Fourth, together with researchers of theimportant sources of innovation and growing productivity—

National Institute of Science and Technology Policy (NISTEP)

and will examine the economic effects of such investments.

of the Ministry of Education, Culture, Sports, Science andTechnology (MEXT), the program will conduct studies on theT

he third characteristic of this program is that it willsources and effects of innovation. Finally, the program will

cooperate with overseas research projects and a range

conduct research in collaboration with researchers from theof both domestic and overseas research institutions andOECD, Imperial College London, Seoul National University,

statistics organizations. Such cooperation will help make it

and other institutions on the international comparison on

possible to compare productivity and its determinants ininvestment in intangible assets, and with researchers fromJapan with those in other countries. At the same time, it will

Peking University, Sogang University, and other institutions

contribute to improvements in government statistics, theon the international comparison of productivity levels of firms.

statistics of international institutions, and to domestic andAdditionally, for the international comparison of productivity

overseas research on productivity. More specifically, thelevels, we have won the cooperation of the International

global collaborations that are planned are as follows: First,

Comparison Program (ICP), led by the World Bank, forby cooperating with the Asian Development Bank Institutepurchasing power parity data.

Research Projects under Raising Industrial and Firm Productivity Program

Project Leader

East Asian Industrial Productivity Project

FUKAO Kyoji

Study on Intangible Assets in JapanMIYAGAWA Tsutomu

Economic Impact of the Tohoku Earthquake: An analysis basedon the Japan Regional Industrial Production Database

TOKUI Joji

East Asian Firm-level Productivity Project

ITO KeikoResearch on Measuring Productivity in the Service Industries
and Identifying the Driving Factors for Productivity Growth

KWON Hyeog Ug

Determinants of the Productivity Gap among Firms in Japan

KIYOTA Kozo

Decomposition of Economic Fluctuations for Supply and Demand Shocks

KONISHI Yoko

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Introduction of Research Programs

New Industrial Policy
Program
OHASHI Hiroshi

Faculty Fellow / Program Director(Associate Professor, Graduate School of Economics, The University of Tokyo)The Great East Japan Earthquake served as an opportunity

manufacturing sector to the service sector, it is necessary toto illuminate the problems that had long existed increate new industrial sectors to generate jobs.

Japan. The overvalued yen and the high effective corporate
tax rate had been cited as factors putting Japanese companies

Along with the need for a "new industry" policy, industrial

at disadvantage in competing with their overseas rivals.

policies attract intense attention worldwide given the economic

Forthcoming changes in the nation's energy policy and othercrisis after the collapse of Lehman Brothers. With interests

challenges brought on by the earthquake spell a harsher

in such policy drawing attention—especially in competingbusiness environment going forward. Against this backdrop,with emerging nations such as China, Korea, and Brazil which

concerns have been raised over the acceleration in theappear to be growing rapidly under the leadership of theiroffshoring of operations from Japan to lower cost economies,

governments—we need to deepen our understanding about

particularly among manufacturers. As the Japanese economy

the new "industrial policy" by taking into account past criticism

undergoes structural changes, shifting weight from theof industrial policies.

This program has the two aforementioned aspects as its
background—the "new industry" policy and the new "industrial
policy"—and it plans to conduct projects with diverse
approaches (Please refer to the table below).

Through the economic crisis following the collapse of Lehman
Brothers, the industrial policy that had not received muchattention for over a decade is now again receiving increasing
attention. Japan, too, needs to formulate and implement
policies that aim to achieve sustainable economic growth bypromptly shifting its allocation of resources from old industries
to new ones, thereby improving the metabolism on the supply
side leading to new goods and services.

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RIETI Highlight 2011 Special Edition

Broadly speaking, the two major agenda for improving thearising from the disconnection of the supply network has

metabolism of the Japanese economy are: 1) the creation

been recognized anew. On the other hand, there is concern

and development of new industries and new companies; andabout an increasing sense of unfairness if the policy decision

2) the turnaround and revitalization of existing companies. The

process regarding government support of particular companies

recent economic crisis and the earthquake have made it clear

lacks transparency. We plan to conduct research also fromthat these agenda cannot be completely left to the market

the perspective of competition policy that would minimize

functions alone and need substantial policy intervention.

government failure by making assessments before and after thefact to prevent any distortion of the competitive environment of

While empirical studies are demonstrating that the factors

the domestic market through government support. Also, howmentioned in Agenda 1)—creation and development of

to rebuild Japan's agricultural industry amidst the decreasing

new industries and companies—drive economic growth

population and globalization is an important perspective

and innovation, long-term efforts are required before thesein considering the direction to take on the Trans-Pacificindustries/companies can stand on their own feet. While

Partnership (TPP) and is an important theme of this program.

expectations are high for innovation in the areas of energy
and medical and elderly care, we would like to include in our
analyses Japan's entrepreneurial activities, which have beenlackluster by international comparison.

There are no versatile prescriptions for revitalizing economic
activities. For both entrepreneurship and reconstructionof companies, subtle policies that take into consideration themarket situation and the industry structure of each case areK

nowing the time-consuming process of entrepreneurial

desirable. New perspectives that traditional research has notendeavors and development of new industries,

covered—how to provide government support while utilizing

turnaround and reconstruction of existing companies andthe discipline of market competition and how to assess suchindustries are more effective as approaches with morepolicies—are needed today. In this program, we will zero in on

immediate payoffs. Through the earthquake disaster, thesuch new topics while collaborating with other programs.

importance of using policy to prevent external diseconomies

Research Projects under New Industrial Policy Program

Project Leaders

Issues Faced by Japan's Economy and Economic Policy:
Demand, productivity, and sustained growth

YOSHIKAWA Hiroshi,
UNAYAMA Takashi

Basic Research for New Industrial Policy

OHASHI Hiroshi

Dynamics, Energy and Environment, and Growth of Small- andMedium-sized Enterprises

AOYAMA Hideaki

Agricultural Policy Reform Aimed at Competitive Agriculture in the Age of
Globalization and Decreasing Population

YAMASHITA Kazuhito

Globalization, Innovation, and Competition Policy

KAWAHAMA Noboru,
OHASHI Hiroshi

Economic Analysis of Environmental, Energy, and Resource Strategies
Following the Great East Japan Earthquake

MANAGI Shunsuke

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Introduction of Research Programs

Human Capital
Program
TSURU Kotaro

Senior Fellow / Program Director

Having reached the 10th year of its establishment,labor, and education as "human capital," there should

RIETI, in its third medium-term plan, has decided to

be a significant reason. This is because—amid the rapid

newly create a program for each major research area. Under

aging of its society, intensifying global competition, andthis plan, research on employment, labor, and education

recovery from the Great East Japan Earthquake—utilizing

will be conducted in the Human Capital Program. As theits human resources will be critical for Japan, a nation

program director, I will briefly explain the research themes

relatively lacking in natural resources, to maintain andand other matters of the Human Capital Program, focusing

strengthen its economic dynamism and increase its growthon matters in which I will be closely involved.

potential. In otherwords, even when

For RIETI to categorize themes including employment,

conducting researchon employment,labor, and education,
how these factors caneventually be linked
to the growth of theJapanese economy will
be important.

T

Non-regular Employment System Reform in Japan:
Changing the way people work
Nippon Hyoronsha Co., Ltd.

he Human Capital Program will be broadly structured
around two perspectives. The first perspective ison the design of labor market institutions that increase
worker incentives and ability. In its second medium-term
research program, RIETI set up the Reform of Labor Market

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Institutions project, in which diverse research activities

resources development in the employment age years such

were undertaken including a book published in June

as vocational training and ability development. Recent

2011, Non-regular Employment System Reform in Japan:

studies, however, show the significance of early childhood

Changing the way people work (written and edited by TSURU

education. There are also issues as to the appropriate form

Kotaro, HIGUCHI Yoshio, and MIZUMACHI Yuichiro, Nipponof higher education that effectively bridges to the working

Hyoronsha Co., Ltd., in Japanese). Related to this project,age. Additionally, as we are rapidly moving to a super aging

which will continue in the third medium term, a symposium

society, there are roles the elderly are expected to play inwill be held in December 2011 and focus particularly on

matters such as passing on skills to the young and educating

wages and other employment conditions, factors thatchildren. Discussions are underway to set up a new projectstrongly affect worker performance. There are also plans toto conduct multifaceted, comprehensive research on

discuss the effects of the Great East Japan Earthquake andmeasures for strengthening human capital and human

the appropriate employment and labor policies, both ofresources capabilities from a full life-cycle perspective.

which are themes of high urgency. Furthermore, we plan
to focus on minimum wages and conduct research that willlead to the publishing of a comprehensive book on its effecton the labor market and appropriate policies.

AI

n conducting research for the Human Capital Program,we will aim to achieve synergy and coherence collectively

by encouraging the different projects to share informationand collaborate among each other.

dditionally, recent empirical research in labor
economics has shown the importance of constructing

original panel data. RIETI has conducted a number of surveys
in the labor/employment field in the past. In the third
medium-term program, the objective will be to enhancethese surveys and also to develop another one that will
enable the construction of comprehensive panel data on

Research Projects under Human Capital Program (Example)

Reform of Labor Market Institutions
Minimum wage group
Labor law study group
Regular/non-regular employees panel data
analysis group
Firm/employee panel data analysis group

Human Capital/Human Resources Reform

both the supply and demand sides of labor (i.e., firms andemployees).

Vibrant Japanese Economy and Society, etc.
Education Finances and Governance

The second perspective is on measures for strengthening
human capital and human resources capabilities from

Developing Human Resources/Management
Strategy for Globalization

a full life-cycle perspective. When we refer to humanresources, importance is often attached to human

RIETI Highlight 2011 Special Edition

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Introduction of Research Programs

Social Security, Taxation, andPublic Finance Program
FUKAO Mitsuhiro

Faculty Fellow / Program Director(Professor, Faculty of Business and Commerce, Keio University; Senior Research Fellow,
Japan Center for Economic Research)T

he public debt-to-GDP ratio of Japan is at a very highto the estimate announced by the Cabinet Office on Marchlevel, rarely seen in other parts of the world, which is23, 2011, total losses in social capital, housing, and private-gradually increasing the risk of a rise in interest rates due tosector companies' facilities from the earthquake disasterhigher risk premiums demanded in the financial markets. The

are expected to be between 16-25 trillion yen. Thus, a huge

Great East Japan Earthquake and the serious accident at theadditional fiscal burden, as a result of increased spending andFukushima Daiichi Nuclear Power Plant are negative factors

decreased tax revenue, is expected to be inevitable in thefor Japan's already tough fiscal condition. The shrinking

coming reconstruction period. Furthermore, in addition to theeconomy will decrease tax revenue, while the increased fiscal

appreciation of the yen, the sovereign debt crises of Greece

spending for the reconstruction of the social capital damaged

and others with the resulting significant rise in governmentby the earthquake and tsunami, the implementation ofbond interest rates in the eurozone will affect Japan in two

programs to support the disaster victims, and compensation

ways. First, the European economy might enter into a serious

for the losses associated with the radiation contamination,

recession with the worsening crisis, which would negatively

etc. will significantly increase the fiscal deficit. According

and significantly affect Japan's exports, both directly andindirectly. Second, the sovereign crisis of the European nations
with lower public debt-to-GDP ratios than Japan might makethe market participants recognize anew the seriousness ofJapan's fiscal problem, possibly triggering the rise in Japanese
government bond interest rates.

Hence, Japan will also be required to increase government
revenue through tax increases, etc. and to restrain government
spending by reviewing the overall social security system. It is,however, facing a difficult issue in that if the fiscal tightening
leads to a recession, it would make fiscal restoration itself
difficult. Greece, in fact, is facing the dilemma that severe
fiscal tightening and its unstable financial system have led
to a significantly negative GDP growth rate, making fiscal
restoration difficult. While it is very challenging to realize
the three goals of resurgence from the earthquake disaster,

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RIETI Highlight 2011 Special Edition

economic recovery, and fiscal restoration, this program willof the Welfare Pension Insurance withheld at source fromexamine and consider policy to manage realization of fiscal

employment income; andrestoration while minimizing its negative effects on economic2) Phased introduction of a carbon tax combined withrecovery.

efficiency-focused investment subsidies for measuresagainst global warming.

T

he overall program will be designed around the following
research projects:

The above policy proposals assume a phased increase of❖ To map out fiscal crisis scenarios and their possible negative

indirect taxes which, by artificially raising prices, would

impacts that may occur in Japan by comparing Japan withencourage accelerated spending through inter-temporalnations that have faced fiscal crises;

consumption substitution. They also take into consideration❖ To estimate Japan's potential growth rate based on

the effect that the improvement in financial backing for social

demographic estimates and expected capital stock andsecurity will have on stimulating consumption, namely, by

prepare a realistic forecast of government revenues;

recovering people's trust in the public pension system. On the❖ To analyze empirically the relationship between Japan's

other hand, the abolishment of the highly regressive, flat-sum

deflation rate and labor and capital utilization rates andsocial security premium would offset the increased burden

clarify why deflation is continuing. Also to explain what

on low-income earners due to the consumption tax raise.

would be the problems if deflation is left unsolved;

Also, the decrease in the rates of pension and other social❖ To study and propose policy measures that would recoversecurity insurance premiums withheld at the income source

sustainable fiscal balance in the long term, while avoiding

is expected to encourage employment of full-time workers byeconomic slowdown;

decreasing taxation associated with employment.

❖ To review the problems of the current taxation and social

security systems and propose fundamental reform of thesesystems, going beyond the conventional tax reform toaddress both social insurance premium and social security
entitlement issues.

In the project which I will be directly involved as a faculty
fellow, we will estimate a macro production function inorder to estimate the total factor productivity (TFP) growthrate. With this function, we can estimate the potential
growth rate of Japan. By breaking down the growth rateWhile we will make specific policy proposals as we makeinto contributions from labor, capital, and TFP, we can better

progress in our research, feasible policy measures

understand the causes that led to the long-term stagnation

include the following:of the Japanese economy. We will also estimate the positive

1) Phased raising of the consumption tax, combined witheffects of increased employment brought about by a lower

the abolition of the flat-sum premium of the Nationalsocial security tax rate and increased investment resulting

Pension System and the decrease in the premium rates

from investment subsidies generated by carbon-tax revenues.

Research Projects under Social Security, Taxation, and Public Finance Program

Project Leader

Policy Mix for Fiscal Consolidation Without Harming Japan's
Economic Recovery

FUKAO Mitsuhiro

Toward a Comprehensive Resolution of the Social Security Problem:
A new economics of aging

ICHIMURA HidehikoEvaluation of Corporate Tax

NIREI Makoto

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59

Introduction of Research Programs

Policy History and Policy
Assessment Program
TAKEDA Haruhito

Faculty Fellow / Program Director(Professor, Faculty of Economics and Graduate School of Economics, The University of Tokyo)This research program aims to study the history of trade

20th century—the subject period of that research—in theand industrial policy and the methodology policy

following 11 domains, in line with the organizational structureassessment that we expect can be derived from the process byof the then Ministry of International Trade and Industry (MITI),

summarizing the research on trade and industry policy history

namely: international trade policy; industrial policy; commerce(1980-2000) conducted during the second medium-term planand distribution policy; industrial location, environment

period which ended in fiscal 2010.

and security policy; basic industries policy; machinery andinformation industries policy; consumer goods industries

In the second medium-term plan of RIETI (fiscal 2006-

policy; industrial technology policy; natural resources and2010), surveys and research were conducted on majorenergy policy; intellectual properties policy; and small andpolicies implemented during the final two decades of themedium enterprises policy. For these policies, the processof such policy formulation, the industrial and economic
conditions that made such policy formulation necessary, theprocess of policy implementation, the state of realization of
the intents of policy, and industrial and economic conditions
following policy implementation were examined. The research
results do not only record historical facts but also include theassessment of policies to the extent possible, and are now
being published as they are completed.

Looking back after going through such activities, westrongly recognize that the final two decades of the20th century were not only a period of significant changes inJapan's economy and society but also a time of very major realand organizational changes in trade and industry policy. This60

RIETI Highlight 2011 Special Edition

research will attempt to make clear how changes in trade andleading to the identification of new issues could be assessed asindustrial policy at the turn of the century were brought about,a creative innovation related to policy formation. In this sense,

based on activities including assessment of the recognition

diverse assessment criteria need to be made available for theof policy issues over the preceding quarter-century, choiceassessment process.

of policy means in response, and their results. Examining thismajor transition period, first of all, we wish to clarify generally
the historical significance of the large shifts in the trade andUnique difficulties include a "specific culture" of MITI
and its successor, the Ministry of Economy, Trade andindustry policy in the 1990s as one of the consequences of theIndustry where their archives are insufficiently developed.

four major changes that occurred in the last quarter-century,

With the development of a legal framework for public

namely: changes in domestic macroeconomic conditions,documents, this situation might improve in the future.

economic globalization on a worldwide scale, new emphasis

Improvement of such foundation of materials is regarded to

on deregulations and fiscal reconstruction, and increasing

be of primary importance. When we consider the fact that theinternational awareness for environmental preservation.

research results of Tsusho Sangyo Seisakushi Kenkyu (Studies

Secondly, in exploring policy areas, we will examineof the History of International Trade and Industrial Policy)—continuities and discontinuities between the period before

one of the projects completed by the Research Institute ofand after 2000, and make efforts to link past research results toInternational Trade and Industry in the mid-1990s—were

the history of economic and industry policy. In compiling thehighly useful as secondary source materials (created with thetrade and industry policy history in the second medium-term

help of MITI using the most recent materials at that time) inplan, we also faced unique difficulties in clearly understanding

compiling the policy history in the second medium-term plan,

and assessing the policy formulation process, the effects of the

we believe it is also necessary to prompt the development

implemented policy intents, etc., and often could not produceof archives through specific research activities on importantsufficient descriptions, contrary to our original intentions.

policy issues.

Although these are times that require everything to
be assessed, it is not easy to determine the causal

association between policies and results. There may becases where judgment on such association might be needed
and cases where arguments as to whether specific policies
achieved their set goals on its own could be made. On theother hand, however, there may be cases where policy
involvement leads to the identification of new issues that
require measures in response. This case of policy involvement

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61http://www.rieti.go.jp/en/
Research Institute of Economy, Trade & Industry, IAA