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June 26, 2012

Re-Examining GDP Growth Projections to Plan Japan's Future Energy Policy

from Japan for Sustainability (JFS) Newsletter No.117

In response to the energy crisis caused by the Fukushima Daiichi nuclear accident in 2011, discussions are underway to review Japan's Basic Energy Plan by the summer of 2012, as reported in the February 2012 JFS newsletter. I am working as a member of the Fundamental Issues Subcommittee under the national government's Advisory Committee on Energy and Natural Resources to discuss options for Japan's future energy mix to 2030.

[Newsletter] Japan's Strategic Energy Plan under Review after 2011 Nuclear Disaster

As an outcome of the nuclear accident, the Fundamental Issues Subcommittee is also discussing of power source mix, asking what proportion nuclear power should we have of the total energy mix, and what power sources can compensate for the reduced supply of nuclear power.

This discussion gives me the impression that we are being told to think about how to cut a pie into pieces without knowing the size of the entire pie. I've been saying at the meetings that we need an estimate of the quantity of energy required before discussing how to secure the supply.

According to the procedure proposed by the subcommittee's secretariat in early March 2012, two different scenarios for the rate of economic growth were established, based on the cabinet office's preliminary calculations: (1) 1.8 percent this decade and 1.2 percent from 2020 (the "growth strategy" scenario), and (2) 1.1 percent this decade and 0.8 percent from 2020 (the "prudent" scenario).

In this context, I suggested that we first discuss the future outlook of the economic growth rate, and invite economic experts to determine the base rate, instead of simply discussing the breakdown of supply sources among the subcommittee members based on the prospects submitted by the secretariat. If it turns out that the projected economic growth rate is higher than actual, the exercise will result in excess energy/electricity demand predictions, which may cause major problems, including the misallocation of domestic investment.

To support my statement, I explained my opinion regarding our future target based on gross domestic product (GDP), by presenting slides titled, "Attaining Affluence and Happiness, Not Economic Scale: Energy Demand Estimates Should be Based on GDP per Capita instead of GDP."

Junko Edahiro's slides at the subcommittee's meeting on March 9, 2012 (in Japanese)

The existing Basic Energy Plan is made by first estimating the economic growth rate, then calculating the energy/electricity demand necessary to meet the economic scale, and finally determining how to supply the energy. The government declared it would review the plan from scratch; therefore, we should start with reviewing the prediction of economic growth rate.

The size of GDP is determined by multiplying productivity by the number of workers in the labor force. In the world of globalization, labor productivity in developed nations is more or less the same. On the other hand, it is estimated that Japan's labor force will decrease by 19.2 percent, or 13 million workers, between 2000 and 2030, due to the rapid aging of the nation's population. Japan will see the world's biggest rate of decline in the labor force as the result of the population decrease. Concerning these situations, it is necessary to have a discussion about facing the reality that the GDP growth rate is anticipated to fall below that of the other developed nations and that the size of the economy will shrink.

Some people may say that we can expand the labor force, but it would be difficult to increase this enough to offset the decline. I think it is more realistic to accept the fact that the economy will shrink, and in that context, find a way that leads to a more affluent society and pleasant life, rather than taking it as something negative.

Is the size of a country's domestic economy really so important? Taking Japan's GDP as 100, Germany would be 60, France 47, the UK 41, Sweden 8, and Finland 4. With these small numbers, do they really lack power as countries?

Our economically affluent lifestyle depends on the level of national income per capita, not on the overall size of the economy. Therefore, I suggest that we project energy/electricity demand based on the GDP growth rate per capita, not on total GDP.

Japan's annual GDP growth rate from 2000 to 2010 was 0.74 percent, while the annual GDP growth rate per capita was 0.65 percent. Based on those numbers, the annual growth rate per capita can be estimated at 0.3 percent this decade to 2020, and zero from 2020 to 2030.

According to the assumption based on the economic growth rate presented in the current basic energy plan, Japan's real GDP in 2030 will be 1.4 times of that of 2010. The net volume in this level will not allow us to avoid adverse effects such as increases of related costs and carbon dioxide emissions. Under this condition, it will be even more difficult for us to consider our preferred future options.

On the other hand, under the scenario that puts the GDP per capita growth rate at the same level as the last decade, the real GDP in 2030 will be 3.7 percent greater than in 2010, and energy/electricity demand will also only show roughly a 3-percent increase, which would allow us some leeway in considering future options.

Later, I was told: "You may have been the first to present a zero-growth scenario in a governmental panel in Japan. Others hesitate to do so."

In fact, not only myself, but another committee member, who is an economist, said, "The working-age population at working age has started to decrease annually by 1.1 percent this decade. Under the premise that the annual GDP continues to grow annually by 1.8 percent in the next decade, we have to calculate both population and per capita growth rate, which makes 2.9 percent altogether. Let me point out that a per capita growth rate near 3 percent has happened only once, around 1990 -- at the time of Japan's economic bubble. Would that be a realistic base rate to guide our discussions on energy mix? Considering the 1-percent annual decrease in working-age population, the national economy will come close to the 'zero-growth' rate. Thus, I assert that the cabinet office's 'prudent' scenario is actually a maximum. If we would like to make a truly 'prudent' scenario, it should be based on zero growth." His remarks changed the tone of discussions.

Reflecting the discussion described above, the secretariat submitted a document proposing a methodology for the estimation of electricity generation at the subcommittee meeting on March 27, 2012. The document started with the following introduction: "Though the secretariat had recommended the use of the growth strategy scenario and prudent scenario by the government, various opinions were expressed at the subcommittee, including that we should aim for a growth rate of about 1.3 percent, and maintain the past growth rate in GDP per capita.

Then, the secretariat added a new scenario and set the following three cases of the growth rates as the base for calculating the necessary quantity of electricity generation.

1. The growth strategy case, which estimates the real GDP growth rate at 1.8 percent this decade and 1.2 percent from 2020. 2. The prudent case, which estimates the real GDP growth rate at 1.1 percent this decade and 0.8 percent from 2020. 3. The member-suggested case, which assumes that Japan will maintain its per capita GDP growth and estimates the real GDP growth rate at 0.3 percent this decade and at zero percent from 2020.

At the meeting, some members said, "With a low growth rate, the government would suffer from inconsistencies with some policies such as the pension system," implying that they would not welcome such a scenario of low growth. However, I believe people who address policies based on easy assumptions that the size of a pie will get larger should reconsider their way of thinking.

Regarding economic growth, I think we need to find out what is possible and what is not from figures including population and the decreasing ratio of productive-age population. We should stop blindly believing in the necessity of economic growth with the excuse of needing to fund things like pension payments, employment, and the Japanese economy. It is more important that we consider how to sustain those things under the situation of a realistic growth rate.

I have read that the role of the economy is originally for the production of wealth, while the role of politics is the distribution of wealth. Since the political (i.e., distribution) function usually causes arguments, politicians tend to avoid the risk of criticism. That may be why politicians tend to avoid dealing with distribution and instead continue promoting an expansion of the size of the "pie" in the context of the economy. It seems as if they were thinking, "The bigger the pie size, the bigger everyone's share. So, we don't have to think about distribution."

In times when the economic pie actually continued to grow, problems did not come to the fore. However, in times when we cannot assume that the economy will continue growing constantly, considering the limits of the Earth and population dynamics, we will have to face the issue of distribution. Otherwise, we will not be able to deal with root causes of anxiety in Japanese society, such as the problem of widening economic disparities.

I think it was a great accomplishment, beyond the specific discussion on energy this time, that the zero-growth case was included in the assumed economic growth rates for consideration of energy issues in 2030, in addition to the government's high-growth case using the growth strategy and the prudent case with a lower rate.

The Fundamental Issues Subcommittee is preparing to announce its energy-mix options, and JFS intends to conduct an international opinion survey when the options are finally presented to the public. We welcome your comments and opinions.

Written by Junko Edahiro

Details on the discussion in this article reported by Junko Edahiro (in Japanese)

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