Technology, Productivity and the Competitiveness of U.S. and Japanese Industries

DALE W. JORGENSON AND MASAHIRO KURODA1

INTRODUCTION

In the early 1980s the U.S. current account balance with the rest of the world shifted from surplus to deficit, falling to almost 4 percent of the U.S. gross national product (GNP) by 1987. During this same period the Japanese current account balance moved from deficit to surplus, rising to more than 4 percent of the Japanese GNP in 1986. These developments have led to a vigorous debate on both sides of the Pacific over the competitiveness of the Japanese and U.S. economies. Did the sharp fluctuations in the Japanese and U.S. current account balances reflect a deterioration in the competitiveness of U.S. industries relative to Japanese industries? Are these fluctuations linked to a change in the relative technological performance of the two economies?2

Satisfactory answers to these questions require a detailed analysis of the international competitiveness of Japanese and U.S. industries. In this

1  

We are grateful to Mieko Nishimizu for her collaboration on earlier phases of the research that we report in this paper. Financial support for this research has been provided by the Japan Industrial Policy Research Institute and the Program on Technology and Economic Policy of Harvard University.

2  

International competitiveness of U.S. industries and its link to technological performance has been explored, for example, in the report of the MIT Commission on Industrial Productivity. For a discussion of technological performance and the U.S. trade balance, see M.L. Dertouzos, R.K. Lester, and R.M. Solow, Made in America (Cambridge: MIT Press, 1989), especially pp. 33–35.



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Japan's Growing Technological Capability: Implications for the U.S. Economy Technology, Productivity and the Competitiveness of U.S. and Japanese Industries DALE W. JORGENSON AND MASAHIRO KURODA1 INTRODUCTION In the early 1980s the U.S. current account balance with the rest of the world shifted from surplus to deficit, falling to almost 4 percent of the U.S. gross national product (GNP) by 1987. During this same period the Japanese current account balance moved from deficit to surplus, rising to more than 4 percent of the Japanese GNP in 1986. These developments have led to a vigorous debate on both sides of the Pacific over the competitiveness of the Japanese and U.S. economies. Did the sharp fluctuations in the Japanese and U.S. current account balances reflect a deterioration in the competitiveness of U.S. industries relative to Japanese industries? Are these fluctuations linked to a change in the relative technological performance of the two economies?2 Satisfactory answers to these questions require a detailed analysis of the international competitiveness of Japanese and U.S. industries. In this 1   We are grateful to Mieko Nishimizu for her collaboration on earlier phases of the research that we report in this paper. Financial support for this research has been provided by the Japan Industrial Policy Research Institute and the Program on Technology and Economic Policy of Harvard University. 2   International competitiveness of U.S. industries and its link to technological performance has been explored, for example, in the report of the MIT Commission on Industrial Productivity. For a discussion of technological performance and the U.S. trade balance, see M.L. Dertouzos, R.K. Lester, and R.M. Solow, Made in America (Cambridge: MIT Press, 1989), especially pp. 33–35.

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Japan's Growing Technological Capability: Implications for the U.S. Economy paper we consider the competitiveness of 29 industries that make up the Japanese and U.S. economies. Our study begins with the 10 years preceding the Smithsonian agreements of 1970. In these Agreements the United States and its major trading partners, including Japan, abandoned the fixed exchange rates that had prevailed since the end of the Second World War. The dollar depreciated rapidly, from 360 yen to the dollar in 1970 to 203 yen per dollar in 1980. After a brief resurgence in the early 1980s the dollar resumed its fall after the Plaza Accord of 1985 and reached a level of less than 130 yen per dollar by the end of 1991. We examine the relative competitiveness of U.S. and Japanese industries throughout a quarter century, 1960–1985, considering determinants of the competitive position of each industry. Our study encompasses the period of growing trade imbalances between Japan and the United States in the early 1980s. It also includes the period of the slowdown in economic growth that accompanied the energy crisis of the 1970s. We begin by comparing the relative position of U.S. and Japanese industries in 1970, on the eve of the Smithsonian Agreements. We find that almost all Japanese industries were more competitive internationally than their U.S. counterparts. By this we mean that Japanese industries could provide products to the international marketplace at prices below those available from their U.S. competitors. The competitive strength of Japanese industries in 1970 was due almost entirely to an enormous labor cost advantage. Standardizing for important differences in education levels and taking differences in the age and sex composition of the Japanese and U.S. labor forces into account, the cost of an hour worked in Japan in 1970 was less than one-quarter the cost of an hour worked in the United States. This labor cost advantage enabled Japanese industries to overcome the formidable disadvantages of higher capital and energy costs and lower productivity. As a consequence of the dramatic appreciation of the yen after the Smithsonian Agreements of 1970, most Japanese industries lost their competitive advantage over U.S. industries by 1973. The rapid appreciation of the yen between 1970 and 1985 reduced but did not eliminate the Japanese labor cost advantage. For the period 1960–1973, Jorgenson et al. (1987) have shown that productivity growth in Japan exceeded that in the United States for almost all industries.3 After the energy crisis of 1973, productivity growth slowed 3   The methodology for this study was introduced by Jorgenson and Nishimizu. They provided a theoretical framework for productivity comparisons based on a bilateral production function at the aggregate level and employed this framework in comparing aggregate output, input, and productivity for Japan and the United States; see D.W. Jorgenson, and M. Nishimizu, "U.S. and Japanese economic growth, 1952–1974: An international comparison," Economic Journal, vol. 88, no. 352, December 1978, pp. 707–726. Subsequently, Christensen et al. extended these comparisons to nine countries, including Japan and the United States; see L.R.

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Japan's Growing Technological Capability: Implications for the U.S. Economy drastically in both countries. Most important, significant differences between growth rates of productivity in Japanese and U.S. industries disappeared. In this paper we extend these observations through 1985. We find that the slowdown in productivity growth in Japan and the United States after 1973 has become permanent. On average, productivity levels in Japanese industries had reached 87 percent of U.S. levels by 1980, but more recent trends reveal no further gains in relative productivity for either the Japanese or the U.S. economy. Technological competition between the two countries, as mirrored in these trends, achieved a measure of stability as much as a decade ago. International competitiveness between Japan and the United States since 1970 has been driven almost entirely by dramatic and continuing depreciation of the dollar. Krugman has shown that trade imbalances in both countries in the early 1980s have now receded, following an adjustment process that has resulted in stunning increases in U.S. exports relative to Japanese exports.4 In fact, since 1985 exports of the United States have grown much more rapidly than exports from any other industrialized country, reflecting the sharply rising competitive advantage of U.S. industries. This is a consequence of the falling exchange rate of the dollar vis-à-vis foreign currencies, including the yen, resulting from the Plaza Accord in 1985. We conclude that the sharp fluctuations in Japanese and U.S. current account balances during the 1980s do not reflect changes in the relative technological performance of the two economies. While relative productivity levels for individual industries after 1980 show wide variations, there is almost no difference on average. This flies directly in the face of much conventional wisdom about the growing technological sophistication of Japanese industries and the alleged technological deficiencies of their U.S. competitors. The error in the conventional view is not in its sanguine appraisal of fast maturing Japanese technological capabilities, but in its gross underestimation of the U.S. competition. We conclude that relative technological performance is only one determinant of international competitiveness of Japanese and U.S. industries. During the period of our study, changes in relative technological perfor-     Christensen, D. Cummings, and D.W. Jorgenson, "Relative productivity levels, 1947–1973," European Economic Review, vol. 16, no. 1, May 1981, pp. 61–94. Their estimates of relative productivity levels are based on the methodology for multilateral comparisons developed by Caves et al.; see D.W. Caves, L.R. Christensen, and W.E. Diewert, "Multilateral comparisons of output, input, and productivity using superlative index numbers," Economic Journal, vol. 92, no. 365, March 1982, pp. 73–86. Jorgenson has updated the Japan-U.S. comparisons; see D.W. Jorgenson, "Productivity and economic growth in Japan and the United States," American Economic Review, vol. 78, no. 2, May 1988, pp. 217–222. 4   P.R. Krugman, Has the Adjustment Process Worked? (Washington, D.C.: Institute for International Economics, 1991).

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Japan's Growing Technological Capability: Implications for the U.S. Economy mance are relatively insignificant by comparison with drastic changes in such determinants as the yen-dollar exchange rate and relative labor costs. These other determinants have moved dramatically in favor of the United States since the Smithsonian Agreements of 1970 and, especially, since the Plaza Accord of 1985. Attempts to trace the trade imbalances of the 1980s to relative deterioration in the technological capabilities of U.S. industries vis-à-vis their Japanese counterparts are totally misleading as a basis for policy recommendations. Attempts to deal with trade imbalances should focus on macroeconomic policy and not on technology or trade policies. To assess the international competitiveness of Japanese and U.S. industries, we first compare prices of inputs and outputs in the two countries at the industry level in the second section. Our second step in accounting for international competitiveness between Japanese and U.S. industries is to measure relative levels of productivity for all industries. We present comparisons of productivity levels between the United States and Japan by industry in the third section. Finally, we employ changes in relative productivity levels, relative prices of inputs, and exchange rates in accounting for changes in international competitiveness between Japanese and U.S. industries over the period 1960–1985. The final section provides a summary and conclusion. PURCHASING POWER PARITIES In order to construct relative prices for outputs of Japanese and U.S. industries in a common currency, we first require estimates of the purchasing power parities for the outputs of all industries. These are relative prices expressed in terms of the currencies of each country. We convert purchasing power parities into a common currency by means of the yen-dollar exchange rate. We have developed purchasing power parities for industry outputs based on the estimates of Kravis et al.5 They have provided purchasing power parities between the yen and the dollar for 153 commodity groups for the year 1970. These commodity groups are components of the gross domestic product of each country, corresponding to deliveries to final demand at purchasers' prices. For international comparisons we have aggregated industries in Japan and the United States into the 29 sectors given in Table 1. We estimate purchasing power parities for industry outputs, energy inputs, and other intermediate inputs by mapping the 153 commodity groups employed by Kravis et al.6 into the industry classification system shown in Table 1. To 5   I.B. Kravis, A. Heston, and R. Summers, International Comparisons of Real Product and Purchasing Power (Baltimore: Johns Hopkins University Press, 1978). 6   Ibid.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 1 Industry Classification No. Industries Abbreviation 1 Agriculture, forestry, fisheries Agric. 2 Mining Mining 3 Construction Construct. 4 Food and kindred products Foods 5 Textile mill products Textiles 6 Apparel and other fabricated textile Apparels 7 Lumber and wood products except furniture Lumber 8 Furniture and fixtures Furniture 9 Paper and allied products Paper 10 Printing, publishing, and allied products Printing 11 Chemical and allied products Chemical 12 Petroleum refinery and coal products Petroleum 13 Rubber and miscellaneous plastic products Rubber 14 Leather and leather products Leather 15 Stone, clay, and glass products Stone 16 Primary metal products Prim. metal 17 Fabricated metal products Fab. metal 18 Machinery Machinery 19 Electric machinery Elec. mach. 20 Motor vehicles and equipment Mot. veh. 21 Transportation equipment except motor Trsp. eqpt. 22 Precision instruments Prec. inst. 23 Miscellaneous manufacturing Mfg. misc. 24 Transportation and communication Trsp. comm. 25 Electric utility and gas supply Utilities 26 Wholesale and retail trade Trade 27 Finance, insurance, and real estate Finance 28 Other service Service 29 Government services Gov. service obtain purchasing power parities for industry outputs in producer's prices, we adjust the price indices for commodity groups in Japan and the United States by ''peeling off'' indirect taxes and trade and transportation margins. We estimate these margins from the interindustry transactions tables for 1970 for both countries. We can account for movements in the relative prices of industry outputs in Japan and the United States by changes in relative input prices and changes in relative productivity levels. To obtain purchasing power parities for components of intermediate input in each industry, we aggregate purchasing power parities in 1970 for goods and services delivered to that industry from other industries. To obtain the purchasing power parity for capital input, we multiply the purchasing power parity for investment goods by the ratio of the price of capital services to the price of capital goods for

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Japan's Growing Technological Capability: Implications for the U.S. Economy Japan relative to the United States. Finally, we construct purchasing power parities for labor input on the basis of relative wage levels for each component of labor input in each industry. Purchasing power parities (PPP) for industry output, capital, labor, energy, and other intermediate inputs in 1970 are shown in Table 2. According to our purchasing power parities for industry output in 1970, prices in Japan were higher than those in United States in only six sectors—agriculture-forestry-fisheries; construction; food and kindred products; petroleum refinery and coal products; rubber products; and finance, insurance, and real estate. The purchasing power parities for labor input in 1970 represent substantially lower costs of labor input in Japan relative to the United States. TABLE 2 The Japanese Price Index Transformed by the PPP Index at 1970 (U.S. price = 1.0) Industry Output Price Capital Price Labor Price Energy Price Material Price 1 Agric. 1.02227 3.87150 0.21352 1.43929 0.94440 2 Mining 0.77726 2.87497 0.21263 1.30837 0.80470 3 Construct. 1.03629 1.62274 0.18607 1.47174 0.74581 4 Foods 1.02708 2.43016 0.21894 1.18676 0.92246 5 Textiles 0.78272 1.26204 0.24099 1.12231 0.80857 6 Apparels 0.77554 1.13210 0.18975 1.16632 0.77818 7 Lumber 0.79291 0.83225 0.22805 1.23132 0.85381 8 Furniture 0.68460 1.63768 0.22952 1.16280 0.78011 9 Paper 0.59568 1.28008 0.22170 1.16325 0.66974 10 Printing 0.79904 1.14215 0.21251 1.12034 0.69357 11 Chemical 0.67636 1.10984 0.25039 1.21555 0.74098 12 Petroleum 1.36638 2.87106 0.21846 1.44058 0.83670 13 Rubber 1.06884 2.06931 0.24042 1.15463 0.77965 14 Leather 0.72536 0.63057 0.23569 1.21586 0.81384 15 Stone 0.72066 1.44996 0.23083 1.19543 0.72436 16 Prim. Metal 0.82182 2.44286 0.25200 1.21269 0.78967 17 Fab. Metal 0.80966 1.97526 0.21072 1.21038 0.79221 18 Machinery 0.62454 1.52710 0.22564 1.22988 0.72346 19 Elec. Mach. 0.67590 2.53075 0.22308 1.17320 0.74262 20 Mot. Veh. 0.80744 6.48334 0.18581 1.14790 0.77968 21 Trsp. Eqpt. 0.91458 1.20783 0.21944 1.19623 0.78940 22 Prec. Inst. 0.71036 1.45034 0.23150 1.18503 0.75505 23 Mfg. Misc. 0.71569 1.25035 0.22549 1.22913 0.76822 24 Trsp. Comm. 0.48741 1.46822 0.22713 1.44717 0.69668 25 Utilities 0.99570 1.64236 0.26605 1.26884 0.81400 26 Trade 0.74680 1.43256 0.26889 1.25899 0.83417 27 Finance 1.04615 0.43883 0.30796 1.14881 0.90131 28 Service 0.87582 1.03805 0.30796 1.18170 0.79488 29 Gov. Service 0.30935 1.00000 0.19482 1.14261 0.81841

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Japan's Growing Technological Capability: Implications for the U.S. Economy In that year hourly wages in Japan were 30 percent or less of U.S. hourly wages. By contrast the cost of capital in Japan averaged 30 percent higher than that in the United States in 1970. The cost of intermediate inputs in Japan, other than energy, was between 60 and 90 percent of the cost in the United States in 1970, but the cost of energy was higher in Japan. Table 3 presents time series for price indices of aggregate value-added TABLE 3 Aggregate Price Index Denominated by PPP Index in Japan and the United States: Value-Added Deflator, Capital Input Price, and Labor Input Price   (1) (2) (3) (4) (5) (6) (7)     Value-Added   Capital Input   Labor Input   Year Exchange Rate Japan U.S. Japan U.S. Japan U.S. 1960 360.0 0.52555 0.78125 0.78566 0.80598 0.07276 0.61019 1961 360.0 0.56383 0.79141 0.87689 0.80344 0.08303 0.64323 1962 360.0 0.58677 0.80059 0.85419 0.87231 0.09436 0.65512 1963 360.0 0.61243 0.80446 0.85692 0.91738 0.10715 0.67076 1964 360.0 0.63366 0.81399 0.94763 0.96885 0.11454 0.69379 1965 360.0 0.66004 0.82973 0.96229 1.05680 0.13142 0.71378 1966 360.0 0.69136 0.86130 1.00588 1.08708 0.14518 0.75560 1967 360.0 0.72035 0.88085 1.10655 1.05501 0.16044 0.79646 1968 360.0 0.74335 0.91004 1.18636 1.07169 0.18585 0.85988 1969 360.0 0.77353 0.95530 1.25112 1.08284 0.21037 0.91525 1970 360.0 0.81298 1.00000 1.31401 1.00000 0.24265 1.00000 1971 348.0 0.86750 1.04681 1.23991 1.08036 0.28735 1.07331 1972 303.1 1.04070 1.09264 1.46593 1.17862 0.37146 1.14591 1973 271.7 1.32003 1.16598 1.78810 1.25925 0.52775 1.23109 1974 292.1 1.60104 1.28333 1.71761 1.21411 0.60654 1.35414 1975 296.8 1.64616 1.41369 1.61942 1.35635 0.70573 1.47582 1976 296.5 1.76077 1.48549 1.72552 1.49660 0.76615 1.60441 1977 268.3 2.03232 1.58890 2.02031 1.70887 0.92403 1.71226 1978 210.1 2.79563 1.71605 2.81199 1.87654 1.22518 1.83214 1979 219.5 2.67617 1.86824 2.72534 1.94851 1.22708 1.98734 1980 203.0 3.04545 2.04895 3.04414 1.95128 1.42033 2.20601 1981 219.9 2.89294 2.22929 2.82067 2.21169 1.38586 2.38345 1982 235.0 2.77932 2.36468 2.57607 2.18761 1.35692 2.53247 1983 232.3 2.86020 2.44372 2.56220 2.38257 1.37437 2.63474 1984 251.1 2.67425 2.52821 2.44013 2.66081 1.29651 2.73714 1985 224.1 3.02171 2.59609 2.80872 2.67648 1.52330 2.85215 NOTE: (1) Observed exchange rate (yen/dollar). (2) Value-added deflator denominated by PPP index in Japan. (3) Value-added deflator in the United States. (4) Capital input price denominated by PPP index in Japan. (5) Capital input price in the United States. (6) Labor input price denominated by PPP index in Japan. (7) Labor input price in the United States.

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Japan's Growing Technological Capability: Implications for the U.S. Economy and capital and labor inputs for the period 1960–1985 in Japan and the United States in terms of dollars. The first column in the table is the yen-dollar exchange rate. The second and third columns represent price indices for value-added for Japan and the United States. The second column is the Japanese price index with base equal to the purchasing power parity in 1970, divided by an index of the yen-dollar exchange rate equal to one in 1970. The third column gives the corresponding price index for the United States with base equal to one in 1970. Similarly, the fourth and fifth columns provide price indices for capital inputs in Japan and the United States in terms of dollars, and the sixth and seventh columns represent price indices for labor inputs. Our international comparisons of relative prices of aggregate output and inputs show, first, that the Japanese economy was more competitive than the U.S. economy throughout the period 1960–1972. Japan's competitiveness deteriorated substantially after 1973 but recovered gradually due to the appreciation of the dollar in the 1980s. Second, lower wage rates have contributed to Japan's international competitiveness throughout the period, especially before the energy crisis in 1973. Lower cost of capital in the United States has contributed to the U.S. international competitiveness for most of the period, with important exceptions in 1960, 1962–1966 and 1984. We turn next to international competitiveness of Japanese and U.S. industries. Exchange rates play the same role in relative price comparisons at the industry level as at the aggregate level. However, industry inputs include energy and other intermediate goods as well as the primary factors of production—capital and labor inputs. Table 4 gives average annual growth rates of input prices in Japan and the United States in the 1960s, 1970s, and 1980s at the industry level. The growth rates of the cost of capital in Japan were almost double those of the United States in the 1960s. Since 1970, average rates of growth in the United States have been considerably higher. The rates of growth of wage rates in Japan were substantially higher than those in the United States throughout the 1960s and 1970s. During the 1980s, however, annual rates of growth of wages in the United States exceeded those in Japan by about 1.5 percent per year. The movements of energy input prices were similar in the two countries in the 1960s. Rates of growth of energy prices in the United States during the 1980s were about 3 percent per year higher than those in Japan. This implies that differences between energy prices in the two countries have been decreasing since 1980, in spite of the relatively high level of energy prices in Japan. The growth rates of other intermediate input prices in the United States were also higher than those in Japan after 1980. The higher growth rates of input prices in the United States since 1980—including capital, labor, energy, and other intermediate inputs—have resulted in a

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 4 Annual Growth Rate of Factor Prices Year Country Growth Rate Capital Service Price (%)     1960–1970 Japan 4.0815   U.S. 2.2153 1970–1980 Japan 0.1736   U.S. 5.6325 1980–1985 Japan 0.0245   U.S. 7.3957 Labor Service Price (%)     1960–1970 Japan 12.1852   U.S. 4.5325 1970–1980 Japan 11.6958   U.S. 8.0232 1980–1985 Japan 3.8372   U.S. 5.2740 Energy Input Price (%)     1960–1970 Japan 0.5428   U.S. 0.4520 1970–1980 Japan 13.8244   U.S. 15.2021 1980–1985 Japan 1.2482   U.S. 4.3105 Material Input Price (%)     1960–1970 Japan 2.1232   U.S. 2.0492 1970–1980 Japan 7.7757   U.S. 8.3268 1980–1985 Japan 0.5493   U.S. 3.3107 NOTE: Annual growth rates of each price are estimated in terms of a simple average of annual growth rates by industry in each factor. substantial deterioration of international competitiveness of U.S. industries relative to their Japanese counterparts. RELATIVE PRODUCTIVITY LEVELS In this section we estimate relative levels of productivity in Japan and the United States for each of the 29 industries included in our study. Jorgenson et al. (1987) have reported relative productivity levels for the two countries for the period 1960–1979. All Japanese industries had lower levels of productivity than their U.S. counterparts in 1960. In order to compare our new results with those in our earlier paper with Nishimizu, we

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Japan's Growing Technological Capability: Implications for the U.S. Economy must note a number of revisions of our methodology. First, we have constructed intermediate input measures for the United States from a time series of interindustry transactions tables for the period 1947–1985.7 Second, the purchasing parity index for capital input has been revised to take account of differences in rates of return on capital. Third, we were able to obtain more detailed information on wage differentials between full-time employees and other workers in Japan. Revisions in our data base have resulted in several substantial changes in the taxonomy of industries presented for the period 1960–1979 in Jorgenson et al.8 Since it is difficult to compare our new results with the previous ones directly due to revisions in our data base, we have presented a new taxonomy for the year 1980 in Table 5. It is difficult to assess the validity of our industrial taxonomy by using the added observations for the period 1980–1985, due to fluctuations of productivity growth by industry. As an illustration, according to the new evidence on the productivity gap between Japan and the United States in the motor vehicles industry during the period 1980–1985, the gap had closed by 1979. After 1983, however, the gap increased again due to rapid productivity growth in the U.S. industry. The index of productivity in motor vehicles in Japan and the United States during the period 1979–1985 was as follows: Year Japan United States 1979 1.00896 1.06235 1980 1.05427 1.00609 1981 1.04083 1.00706 1982 1.00539 0.99941 1983 0.99767 1.02872 1984 1.00147 1.06479 1985 1.00019 1.05392 On the basis of productivity trends before 1980 it was impossible to anticipate the rapid recovery of U.S. productivity and the deterioration of productivity in Japan in the motor vehicles industry during the 1980s. In 7   The methodology for constructing a time series of interindustry transactions tables was originated by Kuroda; see M. Kuroda, "Method of estimation for updating the transactions matrix in input-output relationships," in K. Uno and S. Shishido, eds., Statistical Data Bank Systems, (Amsterdam, North-Holland: 1981). Revised intermediate input measures for the United States were presented by Jorgenson; see D.W. Jorgenson, "Productivity and economic growth," in E. R. Berndt and J. Triplett, eds., Measurement in Economics, Studies in Income and Wealth, vol. 53 (Chicago: University of Chicago Press, 1990), pp. 19–118. 8   D.W. Jorgenson, M. Kuroda, and M. Nishimizu, "Japan-U.S. industry-level productivity comparisons, 1960–1979," Journal of the Japanese and International Economies, vol. 1, no. 1, March 1987, pp. 1–30.

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Japan's Growing Technological Capability: Implications for the U.S. Economy evaluating the usefulness of the industrial taxonomy for 1980, we find several industries in which we were unable to project the trend of productivity gaps by simple extrapolation of trends through 1980. We can say, however, that trends of these gaps between Japan and the United States through 1980 have mostly continued through 1985. To summarize the trend of productivity differences between Japan and the United States, we have estimated the mean and variance of the proportional gaps in the productivity between Japan and the United States by industry during the period 1960–1985. The results are shown in Table 6. The mean of proportional gap in productivity between the two countries gradually increased during the period until 1980. This movement peaked in 1982. By contrast, the variance of the relative productivity levels was fairly stable until the oil crisis in 1973 and has expanded rapidly since that time. CONCLUSION During the period 1960–1973, productivity growth in Japan exceeded that in the United States for almost all industries. After the energy crisis in 1973, there were very few significant differences between growth rates of productivity in Japanese and U.S. industries. However, productivity growth deteriorated substantially in both Japan and the United States. An important issue is whether the productivity slowdown is a permanent feature of both economies. To resolve this issue we can consider average productivity growth rates in Japanese and U.S. industries over the period 1960–1985:   Japan (%) United States (%) 1960–1965 3.269 2.709 1965–1970 4.977 0.005 1970–1973 2.077 2.033 1973–1975 -5.086 -2.123 1975–1980 1.111 0.004 1980–1985 0.003 0.008 We conclude that productivity growth in Japan and the United States has revived slightly since 1975. However the growth rates for the period 1980–1985 are well below those for the period 1960–1973, especially in Japan. A second issue is whether productivity levels in Japan and the United States have tended to converge. While the mean of relative productivity levels between Japan and the United States has been stable since 1980, the variance has increased rapidly. This implies that convergence of Japanese and U.S. levels of productivity during the 1960s had given way to sharply divergent trends in relative productivity by industry during the 1970s and, especially, during the 1980s.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 5 An Industrial Taxonomy in Terms of Differences in Technology   Rates of Differences 1960 Average Annual Rates of Growth 1960–1970 Rates of Differences 1970 Average Annual Rates of Growth 1970–1980 Rates of Differences 1980 Average Annual Rates of Growth 1980–1985 Rates of Differences 1985 Sector   Japan  U.S.   Japan U.S.   Japan U.S.   Type I 1) Agriculture 6.899 -0.615 0.895 -8.205 -1,346 0.508 -26.748 -0.031 4.935 -51.577 12) Petroleum 4.724 -1.840 1.625 -29.923 -6.077 -2.903 -61.663 -1.328 4.068 -88.646 Type II and Type V 6) Apparels -52.543 2.712 0.991 -36.333 1.680 1.693 -36.466 0.269 0.706 38.652 8) Furniture -20.675 1.145 0.544 -14.663 0.285 1.126 -23.079 0.572 0.237 -21.402 9) Paper -7.598 1.778 1.018 0.007 -0.377 0.162 -5.390 1.849 1.151 -1.900 10) Printing -61.847 1.260 -0.254 -46.702 -2.305 0.183 -71.583 0.070 -0.669 -67.885 13) Rubber -66.106 2.637 1.851 -58.239 -2.719 0.043 -61.385 2.656 1.570 -55.957 14) Leather -24.489 0.753 0.483 -21.787 -0.313 -0.150 -23.419 0.338 -0.593 -18.765 15) Stone -29.719 1.945 0.761 -17.911 -1.091 0.200 -30.825 0.373 1.480 -36.361 18) Machinery -13.970 1.851 0.982 -5.279 0.675 1.534 -13.905 -0.958 2.129 -29.340 24) Trsp. comm. -12.339 3.191 1.419 5.380 0.866 1.862 -4.576 1.115 -0.717 4.580 28) Service -46.846 1.186 0.439 -39.372 -1.323 0.510 -57.694 -1.161 -1.330 -56.849 Type III, Type IV. and Type VI 3) Construct. -53.684 -0.973 -0.068 -62.729 -0.682 -0.983 -59.724 -1.647 -0.062 -67.651 4) Foods -21.625 1.030 0.609 -17.409 0.777 0.224 -11.870 -0.793 0.423 -17.957 5) Textiles -15.657 1.619 1.393 -13.339 0.981 0.781 -11.398 0.607 0.762 -12.127 7) Lumber -29.293 1.773 1.236 -23.919 1.463 -0.615 -3.136 4.064 1.108 11.648 16) Prim. metal -10.759 0.642 0.269 -7.033 1.135 0.452 -0.199 0.271 0.843 -3.061 17) Fab. metal -48.592 2.491 0.689 -30.573 0.564 0.428 -29.211 -0.121 0.318 -31.405 21) Trsp. eqpt. -81.014 4.393 1.231 -49.394 -0.655 -0.717 -48.733 1.671 0.632 -43.579 22) Prec. inst. -31.873 2.110 1.215 -22.928 3.325 1.184 -1.522 1.451 2.329 -5.907

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Japan's Growing Technological Capability: Implications for the U.S. Economy   Rates of Differences 1960 Average Annual Rates of Growth 1960–1970 Rates of Differences 1970 Average Annual Rates of Growth 1970–1980 Rates of Differences 1980 Average Annual Rates of Growth 1980–1985 Rates of Differences 1985 Sector   Japan U.S.   Japan U.S.   Japan U.S.   23) Misc. mfg. -33.986 2.610 0.623 -14.118 0.443 -0.341 -6.277 0.110 -0.250 -4.478 25) Utilities -10.592 5.231 1.649 -4.773 -1.093 -1.483 -0.883 -0.386 -1. 112 2.764 26) Trade -43.219 2.914 1.185 -25.933 1.204 0.648 -20.375 0.772 1.378 -23.407 27) Finance -114.450 4.451 0.635 -76.286 1.143 0.281 -67.663 1.551 -1.380 -52.996 Type VII 2) Mining -7.374 3.812 0.813 22.615 1.822 -4.752 88.359 0.124 -0.850 93.227 11) Chemical -16.312 3.271 1.523 1.195 0.741 -1.254 21.067 2.496 1.850 24.298 19) Elec. mach. -23.664 3.331 1.686 -7.213 3.373 2.219 4.329 3.189 0.864 15.958 20) Mot. veh. -27.117 2.974 0.538 -2.759 0.804 0.061 4.679 -1.053 0.929 -5.233 NOTE: Type I: The United States still had an advantage in the 1980 technology. The differences in technology are expected to continue to expand in the future. Type II: The United States had an advantage in the 1980 technology. In the 1960s the differences of technology were closing. But in the 1970s they were again expanding. So, in the 1980s they are expected to expand. Type III: The United States had still an advantage in the 1980 technology. But their differences have been continuously closing since 1960. They are expected to close in the near future. Type IV: The United States still had an advantage in the 1980 technology. But their differences were gradually closing in the 1970s. They are expected to close in the near future. Type V: The United States had an advantage in the 1980 technology. The differences have been mostly constant since 1960. Their trends are expected to continue in the future. Type VI: The United States had an advantage in the 1980 technology. Rates of productivity growth were negative in both countries. The differences are, however, expected to close in the future. Type VII: Japan had an advantage in the 1980 technology. The differences are expected to continue to expand in the future. If the rate of difference in technology is positive, Japan has an advantage in technology and vice versa.

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Japan's Growing Technological Capability: Implications for the U.S. Economy TABLE 6 Mean and Variance of the Proportional Gap of Technology by Industry During the Period 1960–1985 Year Mean Variance Year Mean Variance 1960 0.7577 0.0372 1973 0.8357 0.0378 1961 0.7676 0.0386 1974 0.8331 0.0426 1962 0.7643 0.0364 1975 0.8391 0.0500 1963 0.7642 0.0360 1976 0.8352 0.0512 1964 0.7723 0.0363 1977 0.8446 0.0623 1965 0.7717 0.0366 1978 0.8442 0.0847 1966 0.7871 0.0382 1979 0.8575 0.1017 1967 0.7975 0.0336 1980 0.8701 0.1256 1968 0.8063 0.0317 1981 0.8785 0.1483 1969 0.8214 0.0341 1982 0.8835 0.1688 1970 0.8359 0.0337 1983 0.8778 0.1768 1971 0.8269 0.0351 1984 0.8652 0.1716 1972 0.8221 0.0332 1985 0.8713 0.1492 While the United States retains a very substantial advantage over Japan in relative productivity levels, there is a small number of industries in which Japan has gained an advantage and seems likely to increase it. Perhaps equally important, the increase in the variance of relative productivity levels among industries has created opportunities for both countries to benefit from the great expansion in Japan-U.S. trade that has taken place. However, this increase is also an important source of "trade frictions" and will require continuing efforts at coordination of trade policies in the two countries. Attempts to link trade imbalances in Japan and the United States to relative technological performance are inconsistent with the implications of the extensive body of empirical evidence we have assembled. The sharp deterioration in the U.S. current account balance and the corresponding improvement in the Japanese balance in the early 1980s took place with no changes in the relative technological performance of the two economies. U.S. international competitiveness improved sharply after the Plaza Accord of 1985, as a consequence of appreciation of the yen and other currencies relative to the dollar. This has led to a virtual explosion of U.S. exports after 1985 and a gradual decline in international imbalances in both the United States and Japan. Removing relative technological performance from the list of explanations of trade imbalances will be a prolonged and painful intellectual process. The beginning of this process must involve relearning the economic definition of international competitiveness. "International competitiveness" is a phrase with many different meanings, so that ordinary discourse will be

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Japan's Growing Technological Capability: Implications for the U.S. Economy plagued by seemingly interminable semantic confusion. By focusing on the simple and intuitive concept of relative prices of outputs, expressed in a common currency, economists can do much to dispel this rhetorical fog. Tracing this notion of international competitiveness to its sources in costs of capital and labor and, most critically, the yen-dollar exchange rate can help illuminate trade policy issues on both sides of the Pacific.