China/ Japan: China Overtakes Japan, But Real Lesson May Be For the US

5 October, 2009. By David Caploe PhD, Chief Political Economist.. A provocative piece in the New York Times weighs in on a common discussion topic in Asia: what does China’s “rise” mean for the future of not just Asia but the entire world? [br]

The take-off point is the fact that, much sooner than expected, it seems

5 October, 2009. By David Caploe PhD, Chief Political Economist.. A provocative piece in the New York Times weighs in on a common discussion topic in Asia: what does China’s “rise” mean for the future of not just Asia but the entire world? [br]

The take-off point is the fact that, much sooner than expected, it seems

5 October, 2009. By David Caploe PhD, Chief Political Economist.. A provocative piece in the New York Times weighs in on a common discussion topic in Asia: what does China’s “rise” mean for the future of not just Asia but the entire world? [br]

The take-off point is the fact that, much sooner than expected, it seems

China is going to overtake Japan as the world’s second-largest economy.
Though recent wild currency swings could delay the reckoning, many economists expect Japan to cede its rank as the world’s second-largest economy sometime next year, as much as five years earlier than previously forecast.
Of course, we know from our current situation how seriously “many economists” should be taken.

But even beyond the evident failure of the economics profession as a whole to provide any insights into our current mess, let alone predicting it, the significant question is not when this statistical milestone is going to be reached, but what it actually means about a global political economy that is clearly in the midst of radical upheavals.

Measured in one crucial way, this aggregation of numbers means little, if anything: per capita income.[br]After a lot of hair-pulling, by the time you get to the two-thirds point of the piece – which, btw, you MUST do when reading the New York Times … skim the first half, start to pay attention around halfway through, and then really focus on the last three or four paragraphs, which is where the real news can usually be found – a crucial fact that significantly diminishes the impact of this macro “revolution” emerges:

Per-capita income in China is still less than a tenth that in Japan.

So while its true that by many aggregate measures – in terms of overall purchasing power, for example, Japan was eclipsed by China in the early 90s, and the same is expected vis-à-vis the US by 2020 – China is the smoking dragon of the East, a lot of it can simply be attributed to its huge population of well over 1 billion people. In that sense, this is a bit of a tempest in a teapot, brewed up by people who think the “truth” can always be found in numbers, whatever they may be.

Part of the problem is that numbers always need to be contextualized, and even a little bit of history makes things clearer:

In some ways, [China’s superior growth vis-à-vis Japan] reflects economic fundamentals: As countries develop, growth tends to slow. Annual growth in Japanese gross domestic product averaged 10.4 percent in the 1960s and 5 percent in the 1970s, but only 4 percent in the 1980s and 1.8 percent in the 1990s, according to Goldman Sachs. In the first decade of this century, growth has been even slower.

So a significant aspect of China’s skyrocketing growth rate is simply the fact it is starting from a much lower base-line, combined with its aforementioned massive population.

But there are some lessons to be learned here, although not particularly by Japan, whose still-continuing economic decline began in 1989 – a date the article dances all around, but never explicitly mentions, and whose implications it fails to confront.

What happened in 1989?

The Tokyo real estate market collapsed, imperiling the balance sheets of the major Japanese banks.

And what did the government do? It allowed them to hide their losses, and not confront their failed gambles with other people’s money – the tragic forerunner of today’s “too big to fail” – creating the now infamous “zombie banks”, technically dead but still walking around, thanks to state support.

The result was the so-called “lost decade” of the 1990s, which, in fact, UNDERSTATES the extent of Japan’s economic woes following the 89 real estate crash – Japan has never really recovered since then, and the only reason it grew somewhat well in the early years of the 21st century was the global-boom-gone-bust.

So one lesson that could have been learned – but obviously wasn’t, at least by the United States – is that protecting the interests of the financial sector over the rest of the society and economy is a foolproof formula for the sort of extended / long-term / structural slow / low / no growth experienced by Japan over the last 20 years.

Now, this is a bit sobering, because the collapse of what was feared before the 89 real estate crash as a “rising Japan”, and its cover-up by the bank-dominated government – gee, sound familiar? – pretty much affected only the Japanese, and not anyone else.

The US, however, is at the center of the world economy – a crucial fact we WILL keep drumming into people’s heads until public discourse starts to reflect that understanding.

A “lost decade” or more of low / no / slow US growth is not just bad news for Americans, it’s almost as problematic for everyone else in the world, since, as the EconomyWatch mantra goes:

Countries either sell to the US, or they sell to countries that sell to the US.

That the US has reacted to the collapse of its radically overextended financial sector – and remember the credit card and derivatives shoes have yet to drop – in EXACTLY the same way as Japan demonstrates above all the intellectual failure of both academia and the media in America.

But the US is not the only country that can learn a useful lesson from China’s seeming supplanting of Japan as the Asian behemoth – the other is China.

And the reason is equally simple to observe and state: China has essentially followed the Japanese model of export-oriented growth, producing first and foremost for the domestic American market.

Now what happened in Japan is that the banking sector sucked up so much of the society’s material and intellectual resources post-1989 that it failed completely to participate in the software / internet based growth of the 1990s and first decade of the 21st century. Instead, it was stuck producing fundamentally for the “upscale” elements of American economy and society, as it was continually losing the price war for the “downscale” sector of the US market to up and coming, low-cost producers like – China!

Put bluntly, Japan may have captured the Lexus set, but China was becoming the key factor for the Wal-Mart gang. And while income inequality in America grew radically during Cheney / Bush, those rewards were going to an increasingly smaller part of the population – hence, constricting US markets for Japan, increasing American markets for China. But therein lies the rub for China. Having copied, then bested, Japan’s export-oriented growth strategy, the Chinese now find themselves with an economy structured more or less along the same lines as Japan – which means they are vulnerable to the same sort of difficulty in which post-1989 Japan found itself.

To be sure, the surprisingly nimble Chinese political leadership is aware of this history, and took very different steps from both the Japanese leadership of the early 90s and post-Black September 2008 American “leadership”.

They a) militantly kept their banks out of the global derivatives disaster that is just beginning to unfold, which gave them enough liquidity to b) implement almost immediately a massive domestic stimulation program that has – so far, at least – allowed them to maintain a respectable growth rate .. [for the moment].

The problem for China is if the US market to which they are still so structurally connected doesn’t pick up before the steam generated by their well-conceived and quickly-instituted domestic pick-up program runs out of gas.

The lesson of Japan for China is not the dangers of letting the finance sector dominate the economy and society – that’s what the US should have, but still doesn’t seem to have, learned.

The lesson of Japan for China is that an export-oriented economy is as dependent on the health of its main markets as a crackhead is on its dealer.

Creating domestic demand big enough to sustain China’s massive industrial infrastructure is no easy task. It’s not by any means impossible, especially with such an intelligent leadership.

But it will require a real willingness to consider not just a radical re-structuring of the Chinese economy, but the political changes that may come with it.

That is the key issue for China and the world as we approach the second decade of the Millennium Crisis.

David Caploe PhD
Chief Political Economist, EconomyWatch.com
President, Minerva School /

ACALAHA