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Monday, Oct. 24, 2005
Government's policy yardstick should be based on per capita GDP, not GDP
Finance ministers and central bankers from the G20 advanced and emerging economies expressed strong concern Oct. 16 that high oil prices could decelerate growth and destabilize the global economy as they wrapped up their annual meeting on the outskirts of Beijing.
Reflecting the views of oil-producing countries like Saudi Arabia, one of the participants in the talks, the G20 statement stressed the importance of not just oil producers' efforts, but efforts by oil-consuming nations as well, including the United States, to invest more in oil-refining capacity, pursue alternative energy sources, and promote energy-saving technologies.
The conference also adopted what was called "G20 reform agenda 2005," which set reform targets for each of the participants.
The G20 conference was born out of a proposal made at a Group of Seven meeting in Berlin in 1999 in which participants called for a dialogue to be held among finance chiefs and central bankers from the world's 20 major and emerging economies on a wide range of international financial matters, to stabilize the global financial system and prevent major crises. The G20 conference has been held annually since the first meeting was held that year.
Today, the conference is all the more significant because resolving the world's key economic issues in an era of globalization requires cooperation not only among industrialized nations, but developing countries, too.
Under such circumstances, the so-called BRICs — Brazil, Russia, India and China — are attracting the world's attention, mainly because they all have extremely large populations and enjoy relatively high growth rates.
China alone has a population of 1.3 billion, followed by India's 1.06 billion. The two countries combined account for 37.1 percent of the global population, while the BRICs account for 42.2 percent.
If each one of the people in the BRIC countries spent $1, that would translate into demand of roughly $3.5 billion. With their promise of huge domestic markets, the BRICs are trying to lure foreign investment, urging potential investors not to miss a golden opportunity.
True, a country with a large population has a large potential for growth and could have a huge impact on the global economy. But the size of the population in itself simply points to a potential.
When we try to make economic forecasts, we tend to assume that today's trend will continue. But there is no guarantee that current economic conditions will remain indefinitely. Oil and other energy issues were the main topic of discussion at the G20 meeting and the G7 conference last month, and water shortage and desertification are becoming serious problems in China. The frequency and the size of hurricanes hitting the United States is on the increase — another possible sign that global warming is disrupting weather patterns. The United States and China should seriously consider joining the Kyoto Protocol.
Also, it's not just goods and services that can become scarce. We have to consider the possibility of a funds shortage. J.M. Keynes' theory that savings are a dependent variable of income when a nation's economy is in the developing stage still holds true. Just as we experienced in Japan right after the war, people cannot afford to save money if they are in a hand-to-mouth situation — even if interest rates are high.
In order to make the best use of the nation's scarce savings, Japan introduced its uniquely categorized indirect financing, including the postal savings system.
Today, developing countries are making all-out efforts to lure foreign capital, which they also hope will accelerate transfers of advanced technology.
One indicator of the income level or wealth of a country's people is not gross domestic product, but per capita GDP.
The average per capita GDP of Japan, the U.S. and European Union stands at $36,235, while those of the BRIC countries are $4,047 for Russia, $3,257 for Brazil, $1,270 for China and $621 for India.
True, these countries have wealthy circles. But the gap between rich and poor can be a destabilizing factor, and we have to remember that money held by the wealthy tends to flow overseas.
There is a sense of crisis that China will eventually overtake Japan in terms of GDP. But the growth of developing countries cannot be sustained without support from the savings of industrialized countries.
There is a saying that jobs should be carried out by a large number of people but that tasty food should be shared by a small group. The Diet has just enacted legislation to privatize the postal services — the cornerstone of Prime Minister Junichiro Koizumi's structural reform efforts.
As the next issue on the reform agenda, Japan should review its policy goal of pursuing growth in its economy — by shifting emphasis from GDP to per capita GDP — and build up social security programs and overseas economic aid commensurate with its national strength.
Teruhiko Mano is a professor at Seigakuin University Graduate School.