From Overseas Press

Japan growth strategy may hurt, not boost, economy

(Agencies)
Updated: 2010-07-09 10:10

If history is anything to go by, Japan's plan to boost the sluggish economy by pouring cash into so-called growth sectors could do more harm than good by adding a drag on the country's already relatively low productivity.

Prime Minister Naoto Kan hopes to win votes in Sunday's upper house elections with a growth strategy he says will increase real growth to 2 percent a year.

Analysts have already criticised the strategy as too ambitious when measured against growth for the decade up to the financial crisis in 2008 of about 1.3 percent a year.

One part of the plan, to make sharp cuts in corporate tax, could help. But a pledge to prioritise spending on sectors including the environment, healthcare, tourism and overseas infrastructure development may actually undermine the economy.

"What the government is trying to do is not much different from the past pork-barrel politics where the government invested in public works projects to create jobs when the economy was in a recession," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

"When the government intervenes, it tends to ignore the price-setting mechanism of open markets where high prices are paid to high-quality services, barring companies from boosting profitability and productivity."

Providing government support to handpicked industries tends to shield them from the competitive pressures that would make them strong and more productive, analysts say.

PRODUCTIVITY

Japan's productivity is already the lowest among developed nations. At 70 percent of U.S. productivity, Japan was the bottom of the list for the 15th straight year in 2008, figures from the Organisation of Economic Co-operation and Development show.

Analysts blame low productivity on the failings of past growth strategies, where governments shelled out trillions of yen to support inefficient industries.

In 2000, a government led by then Prime Minister Yoshiro Mori spent about four trillion yen ($45 billion) in a stimulus package focused on public works projects.

That gave a temporary boost to the construction industry mostly by increasing jobs, but also shielded it from competition. The result was a sharp drop in productivity.

While the economy's overall productivity rose 13 percent between 2007 and 2007, in the construction sector it fell 1 percent, an industry group survey shows.

Most of the growth areas defined by the government, such as nursing care, belong to the service sector. The government is aware of past failures from government intervention but it is hoping this time around that the policy mix in the growth strategy will overall provide a boost for the economy.

That said, the main growth engine for the economy has been the manufacturing sector, where output rose 19 percent in the decade up to the 2008 financial crisis.

The services sector grew at less than half that pace and more slowly than the overall economy.

Most industries chosen also represent a small percentage of Japan's service sector. Health care, for example, is just 9 percent of the sector.

OECD figures also show services productivity growth of just 0.64 percent a year between 1991 and 2007,lagging behind manufacturing's gains of 3.45 percent a year.