Knowledge Diffusion and the Japanese Growth Miracle

This paper develops a model in which measured total factor productivity (TFP) is endogenously determined, in order to quantitatively explain the following three facts of the Japanese growth miracle between 1956 and 1973. First, the growth rate of GDP per unit of labor in the second half of this period was 7.9 percent while in the first half it was only 5.5 percent. Second, the rate of return to capital increased from 24 percent to 37 percent in the first six years, and then gradually decreased. Third, the contribution of capital to the Japanese growth rate was 16.5 percent between 1956 and 1966, so TFP drove most of the growth. After the middle of the 1960s, however, capital contributed more than 50 percent to GDP growth. In our model, measured TFP growth is driven by endogenous shifts in labor input from lowto high-productivity workers. These shifts occur through a knowledge diffusion process. In this process, a low-productivity worker acquires knowledge from an existing high-productivity worker to become a high-productivity worker in the future. We calibrate the parameter values using Japanese data and our model quantitatively captures the three facts described above. JEL Classification: E1, O4, O53 ∗Department of Economics, University of Iowa, [email protected] †I am grateful to B. Ravikumar and Raymond G. Riezman for invaluable advice and guidance. I thank Guillaume Vandenbroucke and Gustavo Ventura for their helpful comments. I also thank Mitsunari Ishida, Tae Okada and Keiji Saito for assistance in collecting the data.