In economic theory and practise, there exists a phenomena known as diminishing marginal returns. The whole concept is contingent upon the notion that at a particular point in time in our growth cycle, hard work and increasing levels of productivity start to get us nowhere. We have arrived at a plateau.
On average, developing economies have a higher year-on-year growth rate than developed economies. This is, for the most part, a natural state of affairs. Like a rising phoenix that emerged from the ashes of its former self, Japan rose quickly from the debris of World War II. By 1956, around a decade after the war ended, real per capita GDP had overtaken the prewar 1940 level.
During the recovery period (1945–56), per capita GDP rose at an average annual rate of 7.1%. Postwar recovery was followed by an era of rapid and unprecedented growth. But high growth levels such as these cannot continue into perpetuity. It is neither sustainable nor feasible for periods such as this to last.
Nevertheless, this phenomena was described by economists as ‘a miracle’. Japan was not the only ‘recipient’ of such a miracle as it was one that occurred in many other postwar economies as well. By the 1990s, however, the postwar ‘miracle’ had ended. Not only did the economy lose its ability to grow, the Japanese economy fell into a protracted post-bubble slump and stagnated.
In times of nothingness, we need economic miracles such as these to revive our lives. But when whole industries have been created and structured, miracles such as these can no longer occur, no matter how clever and well-thought out our policies are. That’s when the law of diminishing marginal returns starts to rear its head.
No matter what we do, there is no return to the glory heydays that marked an exuberant and buoyant period of startling and glittering economic growth. This, however, is not as bad of a phenomena as pessimistic economic pundits make it out to be.
The reality of diminishing marginal returns and stagnant growth is far more nuanced. The Japanese economy today is arguably healthier than it has been in over a decade. Although nearly three decades have passed after its asset bubble burst in 1991, Japan is still characterised as economically stagnant. The factors cited are: mounting debts and an ageing population. The data indicators continue to create a momentum of gloom; with estimate forecasts spiralling downwards. It is easy, even natural, to be pessimistic about Japan.
The odd thing about either economic growth or a lack of economic growth is that they both strike fear in the minds of people. When a country is growing too quickly and too fast, there is optimism on the home front and fear-fuelled pessimism on the international front. When a country is seeing modest growth rates–or is stagnating–there is also fear and perhaps even a sense of nostalgia. These, however, are feelings and not facts. While these feelings influence the collective psyche of a people, they are not indicative of hard economic facts, even when they hold a significant sway over the overall direction of the economy.
Japan is one of the largest and most developed economies in the world. It has a well-educated and industrious workforce and its sizeable, affluent population makes it one of the world’s largest consumer markets. A slow down when the economy is large, stable and solidified is no cause for pessimism. If anything, it should indicate that life is, for the most part, very stable.
From a place of stability, things may not grow as fast, but that doesn’t mean that it will shrivel up and fade away into obscurity. Perhaps the returns are not as great as they used to be, but neither have they vanished never to return again.