Was Japan's "rapid economic recovery" after WWII miraculous?: A theoretical explanation"

No 2312, Discussion Papers from Graduate School of Economics, Kobe University

Abstract: This paper is concerned with the existence of optimal recovery paths after an economy has been destroyed by natural disaster or war. A prominent example is Japan after World War II. Japan faced massive destruction of its infrastructure and production facilities and, in fact, starvation and severely high inflation. However, in a relatively short time, 10 years, the country achieved economic recovery. This historical fact indicates that there is an optimal recovery path after economic mass destruction. Under such extreme conditions, one of the key features is that 1) production technology is fixed, not selective, and 2) in view of two industry sectors; the capital goods sector and the consumer goods sector, the capital intensity of the former is much greater than that of the latter. To analyze such a situation, we return to the two-sector growth model with Leontief technologies studied by Shinkai and Corden in the 1960s and transform it into a continuous time optimal growth model with the Leontief technologies. In this study, we focus on nonlinearity and interior-point solutions, under the assumption that the capital intensity of the capital goods sector is extremely greater than that of the consumption goods sector, two critical points were derived. These two critical points indicated the unstable focus (or unstable point) and the saddle, respectively. The transversality conditions show that the saddle-point stable point is the only optimal solution and the optimal recovery path. Then, history-based parameter selection and numerical analysis showed that the initial per capita capital stock, given historically, must be close to the unstable focus and that government policy is needed to make the economy jump onto the trajectory which eventually converges to the optimal steady state path. In other words, Japan's economic recovery was miraculous. (280)

Pages: 22 pages
Date: 2023-07
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