PPPC Public Policy Japan Report Blog: What is it that Promotes Economic Growth?

(TAKAHASHI Yoichi, PPPC Chairman)

What is it going to be like in 2050 if the economy shifts at the current speed? Currently Japan’s GDP per capita is more or less $40,000, raking 20^th in the world. By definition, the “advanced country” refers to those whose GDP per capita is more than $10,000 so Japan indeed is an advanced country. However, the average growth rate of Japan in the recent 20 years is 0.8%, which almost the lowest in the whole world. If the current trend continues, Japan’s GDP per capita in 2050 will be around $50,000.

As the U.S’s average growth rate is 3.6%, its GDP per capita will be $190,000 in 2050 from the current $50,000. In Euro, where the growth rate is 3.8%, its GPD per capita will be $150,000 from the current $40,000.

The world’s average growth rate is about 4.3%. It means a $10,000 will be equivalent with $50,000 in 2050. At that time, Japan will no longer be an advanced country. Though not the least developed, it will be a middle-income country or so.

Transition of GDP per Capita (US$)

(World Bank: speculation of 2050 from transition in the last 20 years)

Then how do we realize an economic growth? This is the most difficult question which if one knows its answer there will be no need of economics. Paul Krugman once said if one can figure this out then the world’s poverty can be solved all at once so deserving Nobel Prize. There is no simple answer to this difficult question, but the author has started to have a partial clue.

The following are correlation of GDP per capita and various other economic indexes. If the correlation coefficient is low, maybe there is no interrelation. If there are, then the cause and effect should be investigated.

As result of these efforts, what attracted my attention was the influence of money, which showed coefficient of 0.5; a little less than enough to conclude there is correlation but outstanding compared to the others.

Looking at the data of individual countries, the expansion rate of money has influence on the growth rate with a time rag of one-two years, though its cause and effect are yet known. Maybe it is an effect of economic growth in the past, but we can increase or decrease supply of money through monetary policy. And it seems quite natural that such an artificial factor could be a cause of economic growth rate.

Of course this is not to say that the money-supply alone can explain economic growth, but so far other possible elements are yet to be found. Please see the correlation studies below.

Money-Supply (horizon) and GDP per Capita (vertical) (1994-2013)