If you had two minutes with Prime Minister Shinzo Abe to give him one piece of advise on how to build the foundation of a sustainable prosperity, what would you tell him? You may think, this is impossible, the world is too complex and economics is too confused a discipline to provide simple solutions. Surely, there is no “magic bullet” that ensures sustainable growth.
Well, that’s what I thought, until I started looking at the data. No, it is definitely not the standard macroeconomic policy tool kit that delivers sustained prosperity. Although useful for short-term growth boosts and asset price volatility, neither fiscal policy nor monetary policy has a consistently positive and lasting track-record.
In fact, monetary policy stands particularly exposed to diminishing rates of returns of its actions: Ten years ago, ¥1 created by the Bank of Japan generated ¥10 of national income or GDP, but today the same ¥1 from the central bank creates only ¥1 of GDP. Call it quantitative easing or call it qualitative easing, the empirical evidence is overwhelmingly strong that money alone does not create lasting growth and prosperity. Simply put: Giving our children more pocket money does not increase our chances of having a stable pension income in the future (although obviously the kids may well have more fun in the meantime).
So where does sustained growth come from? One word — entrepreneurship. Across all the major economies, tracked over the past 50 years, the best correlation and positive causality to explain per-capita GDP growth is the percentage of entrepreneurs in the population. Basically, if the number of entrepreneurs increases by 1 percent of the total population, per-capita GDP gets a boost of about half a percent.
In practical terms, the importance and the power of entrepreneurship is borne out in employment and job-creation data. After all, it is employment and personal incomes that are the foundation of any economy’s prosperity, and it is always private enterprise and private companies that create jobs and opportunities for rising incomes. Most importantly, the data is overwhelmingly clear that it is new companies that create jobs, while old and established companies are actually net destroyers of jobs.
Specifically, during the six years of Abenomics (end of 2012 to end of 2018), total non-farm employment rose by 4.3 million people, from 60.4 million to 64.7 million. By age of company, companies older than 50 years actually cut approximately 5.1 million employees, while companies set up five years ago (during or after 2013) created approximately 1.8 million new jobs; and a total 4.8 million jobs were created by entrepreneurs who started their corporate adventure within the past decade.
To be sure, the importance of “middle-aged” companies in Japan should not be underestimated. Corporations age 10-50 years generated a strong 4.6 million new jobs. However, to become middle age, you’ve got to start young. Make no mistake — the incredible job creating power of startups is absolute key to sustained jobs, income and productivity growth. To go back to the example of our children’s allowance: Investing in our children’s entrepreneurial ventures definitely raises our chances of having a stable pension in the future; and if the transition from small startup to sustained mid-size company is successful, a stable pension is more than guaranteed.
Meanwhile, the fact that the companies 50 years or older are huge job destroyers is very worrying. Yes, corporate dinosaurs are a serious drag on national income because not only are they net job destroyers, but also most likely substantial sub-par on productivity and capital returns. The often outdated legacy technology and outdated but entrenched internal procedures of the dinosaurs gives an incredible advantage to new startups with better information technology, more flexible work processes, and faster decision-making managerial powers. This is not to say that old is necessarily always bad; but it is clear from the data that old established companies with an entrenched and proud corporate culture will have to work much harder to re-invent themselves and re-emerge as net-plus contributor to national prosperity.
The good news is that Japan is obviously on the right track. The Abenomics era data on new startup job creation shows Japan moving very much in the right direction. However, there is no room for complacency. Compared to other nations, Japan lags behind in entrepreneurship. Germany, for example, has three entrepreneurs for every two in Japan (as a share of total population); and in both the United States and Israel there are twice as many entrepreneurs as in Japan (again adjusted for population). This is exactly why structural productivity and prosperity growth is higher there than here in Japan.
So what is the two-minute pitch to Abe? Focus on creating an entrepreneur-friendly ecosystem. There are many rules and regulations that stand in the way, and more deregulation is always good advise. However, the regulatory burden does not prevent true great entrepreneurs to emerge — think of Fast Retailing’s Tadashi Yanai; Zozotown founder Yusaku Maezawa; or female success Tomoko Namba from DeNA . True entrepreneurs will fight against hardship and find a way. However, what they do crave and do need most is a culture that allows failure, a culture that actually celebrates failure as a necessary step toward success.
Just as Abe deserves huge credit for changing the national agenda by embracing “womanomics,” a top-down push to encourage the risk of failure would be the catalyst for more positive risk-taking, more ventures and more entrepreneurship. Here, Israel is global best-in-class for creating a startup nation mindset and ecosystem. Take that as a starting point, perfect it, and launch the startup Japan entrepreneurship doubling plan. Sustained prosperity will be the reward.
Based in Tokyo, Jesper Koll is WisdomTree’s senior adviser and ex-CEO (Japan). Researching and investing in Japan since 1986, he is ranked as a top Japan strategist/economist. www.wisdomtree.com/blog
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